As an expert witness Lance Wallach side has never lost a case!
Specialize in 419 plans,412i plans, captive insurance plans, welfare benefit plans, section 79 plans

Thursday, June 1, 2017

Mark Callahan was sued along with American General and others for selling a listed transactions

Lance Wallach was retained as the expert witness for Mark Callahan.
Mark Callahan participated in the sale of a listed transaction. With the help
of Lance Wallach the case against Mark Callahan was dismissed. As part of the
arrangement Lance Wallach agreed to become an expert witness for the plaintiffs
against American General. This is a very unusual arrangement whereby the expert
witness for a defendant agrees to testify for the plaintiff against another
defendant. In return, one of the defendants Mark Callahan was dropped as a
defendant.

The case below is a perfect example of Lance Wallach’s abilities
as an Expert Witness.

Lance Wallach not only wins for the plaintiffs, but has also won for the
defendant.

2AIG’s amended motion for summary judgment (Doc. 159), J&M’s
response (Doc. 170), AIG’sreply (Doc. 192), and J&M’s supplemental brief
(Doc. 197).1FACTSAIG “is the world’s leading international insurance and
financial services organization,with a history of more than 80 years in the
two largest of its four principal businesses: GeneralInsurance and Life
Insurance.” (Doc. 181-1, p. 3). AIG had previously developed a lifeinsurance
policy entitled the Platinum Value Master 5 or “VM5.” (Doc. 178-1, pp. 7-8;
Doc.181-1, p. 7). A VM5 policy is “a whole life insurance product” modified
for use in certainfinancial concepts. (Doc. 171-1, Lalat Dep., p. 9). In
other words, a VM5 policy “can bepurchased with tax-deferred dollars if you
choose to purchase it in your qualified retirementplan” and “may be used to
provide valuable life insurance protection while absorbing excessfunds.”
(Doc. 181-1, p. 7). The VM5 policy was developed, in part, for use in “419
plans.”(Doc. 171-3, Lalat Dep., p. 40). As explained by J&M’s expert, a
plan under Internal RevenueCode § 419A(f)(6) can consist of a trust with a
custodian that operates and administers the plan,and the trust can be a tax
exempt Voluntary Employers Benefit Association trust under IRS Code§
509(c)(9). (Doc. 180-2, Bass Dep., p. 36-37). Section 419 specifically provides
forcontributions to welfare benefit plans. (Id., pp. 37-38). The welfare
benefit plan at issue here isa Voluntary Employers Benefit Association plan
for California Building Supply Wholesalers andContractors League (“VEBA
Plan”).1 While J&M’s supplemental brief was stricken by this court’s
order dated October 5,2010, this court will consider the arguments in the
supplemental brief that specifically addressthe arguments found in AIG’s
reply. Therefore, J&M’s motion for reconsideration of this court’sorder
striking its supplemental brief is moot.Case 1:07-cv-00883-CG-N Document 223
Filed 11/12/10 Page 2 of 553There are seven levels of AIG agents. (Doc.
180-1, Childs Dep., pp. 23-25). Levels 1through 3 are associated with
producer contracts, levels 4 through 6 are for general agentcontracts, and
level 7 is a master general agent contract, the highest level in the hierarchy.
(Id.).A master general agent “is one who recruits [agents] in addition to
sell [life insurance], if they sochoose.” (Id., p. 3). A master general
agent can market an insurance policy, like the VM5policy, by use of an AIG
appointed agent without seeking further approval from AIG. (Id.,
pp.26-28).Innovative Private Strategies & Insurance Services, Inc.
(“Innovative”) has a mastergeneral agent contract with AIG. (Id., p. 22;
Doc. 181-2, p. 1). That contract was signed byLaban Pattanaik (“Laban”).
(Doc. 181-2, p. 1). Laban is the 100% owner of Innovative and washimself
appointed by AIG as a general agent in 2001 and as a Level 7 master general
agent inFebruary 2004. (Doc. 170, Lalat Dep., p. 4; Doc. 181-3). Laban is
also a 50% owner of alimited liability company named I.P.S. Private Advisors
(“IPS”). (Doc. 171-1, Lalat Dep., p. 3;Doc. 173-1, Lalat Dep., p. 29).
Innovative, which did not market VEBA or employee benefitplans, would retain
the services of IPS to market VEBA plans. (Doc. 171, Lalat Dep., pp.
7-8).Innovative would “informally” retain Lalat Pattanaik (“Lalat”), who is
Laban’s brother and anemployee of IPS, to “market… concepts for business
owners” like VEBA plans. (Doc. 171-1,Lalat Dep., pp. 5-6). Generally, once a
client enrolled in a VEBA plan, the life insurance policywas sold to fund
that plan and AIG paid commission to Innovative and/or Laban. (Id., p.
8).From the AIG commission, Innovative paid Lalat a fee and all marketing
expenses. (Id.).Starting in or around 2001 or 2002, Lalat had discussions
with AIG personnel “[o]n anongoing basis… and extensively” about the
financial concepts he marketed. (Doc. 171-1, Lalat.Dep., p. 11). Lalat
testified that he has spoken with the following people at AIG: Chuck
Clark,Case 1:07-cv-00883-CG-N Document 223 Filed 11/12/10 Page 3 of
554Royce Imhoff, who was the president of AIG “for some time”, Dennis
Roberts, who is the “chiefCMO and then chief distribution officer”; Larry O’
Brien, who is “[o]ne of the top threeexecutives at [AIG]”; David Robinson,
who is senior counsel to AIG and later head of advancesales in the Affluent
and Corporate Markets Group; Walt Rudecki, who was an attorney“counterpart
to David”; and Rod Martin, who was the head of AIG “life insurance
worldwide.”(Id., pp. 11-12; Doc. 172-1, Lalat Dep., p. 25; Doc. 178-1,
Robinson Dep., p. 10). Lalat, hisbrothers, and staff also met regularly with
Peter Mordin, who is the National Marketing Directorfor AIG. (Doc. 172-1,
Lalat Dep., p. 17; Doc. 182-1, p. 11), and Lalat testified that Peter
Mordinand David Robinson were not only aware of and never objected to
Lalat’s marketing strategy butalso they allowed Lalat to use AIG-generated
marketing materials and software in hismarketing. (Doc. 173-1, Lalat Dep.,
p. 6-7, 12, 21-23).Lalat also testified that AIG would request “plan
documents, IRS determination letters,historical audits of the programs [he
would be marketing], and then on an ongoing basis fromtime to time they
requested certain things” from Lalat and that AIG provided an advisors
guide,which included a section on VEBA plans and which “was probably the
most significantmarketing piece” Lalat used. (Doc. 171-1, Lalat Dep., pp.
17-18 & 25-26). He also testified thatAIG has provided him and
Innovative with numerous other marketing publications for VEBAplans. (Doc.
172-1, Lalat Dep., p. 19 & 29-30; Doc. 182-1, p. 19). Moreover, he testified
thatover a ten year period, AIG was associated with or financed all but one
of the VEBA plans oremployee welfare benefit plans that Lalat had marketed.
(Doc. 173-1, Lalat Dep., p. 19). Lastly,Lalat maintained that AIG never
objected to or refused to provide funding if the clients wereinsurable.
(Id., p. 20).Case 1:07-cv-00883-CG-N Document 223 Filed 11/12/10 Page 4 of
555David Robinson has had several different roles with AIG, serving as
“senior counsel, taxattorney and a product tax attorney” before he “went
into advanced sales, advanced salescounsel.” (Doc. 178-1, Robinson Dep., pp.
2-3). As an advanced sales counsel, he worked “withsome of the marketing and
business leaders in developing” and worked “with products andassisting
agents who were selling insurance to their clients and sophisticated estate
planning, taxplans” like the VM5 plan. (Id., p. 3). Robinson worked under
Royce Imhoff, who was the chiefexecutive officer of the independent
distribution, and Dennis Roberts, who was the chiefdistribution officer of
the independent distribution. (Id., pp. 5-6). In or around August 2002
or2003, after being promoted to counsel in advanced sales, Mr. Robinson was
introduced to Lalatby Peter Mordin because Mordin “was introducing [Mr.
Robinson] to various agents andagencies because [he] had recently changed
positions within the company.” (Id., pp. 9-12).2 Mr.Mordin had informed Mr.
Robinson that the Pattanaiks’ firm, IPS, was “in the insurance
businessselling insurance to upscale, affluent people.” (Id., p. 13). Mr.
Robinson determined that IPSwould benefit AIG because AIG “sold insurance”
and “[t]hey were going to distribute [AIG’s]product” since “[t]hey were an
agent.” (Id., p. 14). Mr. Robinson thereafter was incommunication with
Innovative and Lalat about the products they were marketing and
sellingincluding the VEBA plan and the VM5 policy and admitted that AIG
benefited from IPS sellingAIG products. (Id., pp. 16-19).The VEBA
product which J&M ultimately became a participant in was administered by
acompany called Sea Nine Associates, Inc. (“Sea Nine”). (Doc. 173-1, Lalat
Dep., p. 11).Kenneth Elliott was an employee of Sea Nine and the
administrator of the VEBA plan involving2 Mr. Mordin specifically introduced
the Pattanaiks “as agents who were doing businesswith the company.” (Id., p.
20).Case 1:07-cv-00883-CG-N Document 223 Filed 11/12/10 Page 5 of
556J&M. (Id.). Mr. Elliott served two roles in regards to the VEBA
plans: one as “the servicingproducer” and the other as “the writing
producer”. For those roles, he received a 15%commission. (Doc. 180-1, Childs
Dep., pp. 7-8). Lalat testified that AIG was aware that KenElliott was
involved in the administration of the VEBA plans and that “[t]hey had
directcommunication from time to time with him.” (Doc. 173-1, Lalat Dep., p.
32). Lalat testified thatduring the time at issue in this case, he did not
market any VEBA plans without Innovative orKen Elliott “having knowledge of
it.” (Doc. 173-1, pp. 18-19).In or around July 2003, Mr. Robinson learned
that “the IRS had promulgated regulationsunder 419A(f)(6) of the Internal
Revenue Code.” In layman’s terms, the IRS attempted “to set aset of
guidelines for a compliant plan” but there were still “certain things that were
leftunresolved and gray that made it very difficult for plan operators to
design a plan with certainty.”In particular, one of these gray areas was
“[c]ontribution limits.” Mr. Robinson testified that his“understanding of it
would be where plans distribute assets out of the plan and do it in a
manneras that it is a mimic for deferred compensation. It’s really deferred
compensation. And if a planis designed in such a way that a participant can
withdraw money from the plan, that there is apossibility that it will be
deemed deferred compensation and it would disqualify . . . the plan. “(Doc.
178-1, Robinson Dep., pp. 22-23). Upon learning that the IRS had established
finalregulations, AIG attempted to determine if the VEBA plans being
marketed were in compliancewith these final regulations. (Id., pp.
24-25).David Robinson asked Peter Mordin who in turn asked the Pattanaiks to
supply AIG withcompliance information. (Doc. 171-1, Lalat Dep., pp. 33-34).
Lalat testified that he had an“ongoing concern” that the VM5 policy was out
of compliance, and that he expressed thisconcern to AIG. (Doc. 172-1, Lalat
Dep., p. 18). On or around September 5, 2003, Mr. ElliottCase
1:07-cv-00883-CG-N Document 223 Filed 11/12/10 Page 6 of 557of Sea Nine
provided Mr. Robinson a letter which reflected Mr. Robinson’s compliance
request,with a memorandum to Lalat and his father from J. Michael Mangawang,
who is Sea Nine’sERISA advisor, relating to the final 419 regulations. (Doc.
173-1, Lalat Dep., pp. 13-14; Doc.183-1, pp. 1-8). In his letter to Mr.
Robinson, Mr. Elliott states that “[w]e would like to engage amajor law firm
to thoroughly analyze numerous items associated with our plan and the impact
ofthe regulations...” (Doc. 183-1, p. 2). On November 15, 2003, Lalat
notified Mr. Mordin andMr. Robinson by e-mail that the plan was being
reviewed by Bruce Ashton of the Reish lawfirm, a firm that was recommended
by AIG. (Doc. 173-1, Lalat Dep., pp. 15; Doc. 171-1, LalatDep., p. 35; Doc.
183-1, p. 9). On November 17, 2003, David Robinson emailed Lalat that AIGwas
placing the VEBA trust on an updated list of acceptable plans for placement of
insuranceproducts but that he still needed to see the compliance documents
by January 2004. (Doc. 183-1,p. 9; Doc. 173-1, Lalat Dep., p. 16).On or
around January 27, 2004, Lalat helped prepare a letter to Mordin in response
toRobinson’s compliance request and as an “ongoing effort[]” to keep AIG
apprised of thedevelopments regarding plan compliance. (Doc. 171-1, Lalat
Dep., p. 31-32; Doc. 183-1, pp. 12-14). The letter provided that:As you
are aware, we have been developing a long-term alliance with AIGAmerican
General over the last 2+ years with the hopes of1. generating substantial
business in the dynamic area of qualified multipleemployer welfare benefit
plans and2. eventually expanding the distribution channels for our plans
with theassistance of the Affluent and Corporate Markets Group and its
agents.Because of our interest in a stable long-term strategic alliance with
your group,we wanted you and your agents to be comfortable and supportive of
ourprograms. In order to facilitate this, we decided to engage a major law
firm…whose opinions were highly regarded by AIG…. Consequently, because of
ourdiscussion with you and David Robinson… we decided to engage Reish
LuftmanCase 1:07-cv-00883-CG-N Document 223 Filed 11/12/10 Page 7 of
558Relcher & Cohen (“Reish”) – a firm that was already of counsel to
yourcompany…As a result of the final 419 regulations which were released
in 2003, we felt thatReisch should evaluate the structure and operations of
our programs in light ofthese regulations to ensure continued compliance. We
also wanted them toreaffirm that we are a plan under ERISA as currently
operated. Both of theseitems are very significant in sustaining the
deductibility of employer contributionsto our program. They are also
critical to differentiating our programs from thenon-qualified “419” plans
which claim that they do not fall under the guidelines,and therefore do not
have to meet such standards and restrictions.” As you cansee, Reish’s
opinion is to the contrary…We have attached herewith the initial draft
letter provided by Reish.(Doc. 183-1, pp. 12-13).The attached Reish law
firm draft letter stated that Ken Elliott, on behalf of Sea Nine,asked Reish
“to address whether the several [VEBAs] administered by Sea Nine
Associatesconform to the requirements set forth in Treasury Regulations
under Internal Revenue Code…sections 419 and 419A (“the 419 Regulations”).
You have asked us to consider whether theVEBAs are exempt from the 419
Regulations.” (Doc. 183-1, p. 15). Reish first concluded that“[b]ecause the
Plan and Trust do not contain provisions required under the new 419
Regulations,the VEBAs do not currently meet the requirements of the 419
Regulations.” (Id., p. 16). Reishalso concluded that the VEBAs were not
exempt from the 419 Regulations. (Id., p. 17). In sum,Reish maintainedIn
short, the VEBAs are subject to two sets of regulation[s] under both
ERISAand the requirements of the Code applicable to arrangements exempt from
taxunder Code section 501(c)(9). In addition, the employers who sponsor
andcontribute to the VEBAs are subject to the limitations or lack thereof on
thedeductibility of their contributions under Code section 419 and 419A
withoutregard to whether the plans are subject to ERISA.(Id., p.
18).On January 30, 2004, IPS sent a letter to Peter Mordin stating that in
light of opinionletter from Reish, they will amend “[o]ur plan documents and
some operational aspects of ourCase 1:07-cv-00883-CG-N Document 223 Filed
11/12/10 Page 8 of 559program… accordingly” and that “[w]e will notify
you of the changes and make available thefinal documents resulting from
their recommendations – when they become available.” (Doc.183-1, p. 20). The
letter also stated that IPS plans “on maintaining an ‘open book approach,
andmaking transparent to your team, any structural, operational and
documentation changes thatReish recommends.’” (Id.). Mr. Robinson testified
that he and the company never received afull response from Mr. Elliott or
anyone else about the compliance of the Sea Nine VEBA plans,and he notified
Mr. Modin and Mr. Imhoff that he had been asking for compliance and had
notreceived a full response concerning these plans. (Doc. 178-1, Robinson
Dep., pp. 27-28 & 34-35).3J&M is a “Mississippi corporation with
its principal place of business located in MossPoint, Jackson County,
Mississippi” and “is engaged in the business of leasing employees
andproviding services to industrial and marine clients.” (Doc. 1, p. 2).
John and Mike Wilks are theowners of J&M. The Wilks first learned about
the VEBA plan concept in October 2003 from G.B. Taylor of Point Clear
Insurance Services, and Mr. Taylor had previously heard of the VEBAplan
concept from Mark Callahan. (Doc. 159-4, J. Wilks Dep., p. 3-4; Doc. 183-2,
Taylor Aff.,pp. 10-11). Mark Callahan is a Level 1 appointed agent who is
authorized to sell fixed andvariable insurance policies including the VM5
policy in Mississippi and Alabama. (Doc. 180-1,Childs Dep., pp.
20-21).In early 2004, John, Mike, and their father Billy Wilks met with Mr.
Callahan. (Doc.159-5, B. Wilks Dep., p. 4). At that meeting, Mr. Callahan
“told [the Wilks] about the VEBA3 In February 2004, Robinson’s position was
eliminated by senior management, and hebecame counsel of another
distribution or profit center called Independent Advisors Network.(Id., pp.
29 & 36). However, Robinson testified that if the compliance documentation
had beensent to him at AIG, it would have been directed to him or forwarded
to Mr. Imhoff who was the“business leader of that profit center or that
division”. (Id., p. 30).Case 1:07-cv-00883-CG-N Document 223 Filed 11/12/10
Page 9 of 5510plan and explained how it worked, and that it was –
involved with AIG. And he… hit the highspots… at that particular meeting.”
(Doc. 176-1, B. Wilks Dep., p. 4). Specifically, he told them“the purpose
[of the VEBA plan] was to generate a retirement for the participants and that
itwould be tax exempt going in and coming out” but “[h]e didn’t really get
into the details of thatpart of it at that time.” (Id., p. 5).After a
couple of telephone conversations, the Wilkses had a second meeting “a week
ortwo later” with Mr. Callahan at his office “because [Mr. Callahan] had
told [the Wilkses] that hehad some information coming in on the VEBA program
that he would like to show [theWilkses]…” (Id., p. 6). The Wilkses met a
third time with Mr. Callahan in March 2004. Eitherat that time or in the
February 2004 meeting, Mark presented the Wilkses with brochures relatingto
the VEBA plan. (Compare Doc. 159-4, J. Wilks Dep., p. 8 with Doc. 176-1, B.
Wilks Dep., p.8(At February meeting, Mark “had brochures and fliers and
information about the VEBAprogram at that time which he shared with [the
Wilkses].”)). G.B. Taylor testified that at themeeting, “Mark Callahan told
everyone that the VEBA Plan was an AIG-developed program”and that “by
enrolling in the VEBA Plan, they would be entitled to tax deductions for
thecontributions used to pay premiums… and that the VEBA Plan would provide
them lifetime taxbenefits, and tax-free money would be paid to the
beneficiaries at the end of a period of time.”Mr. Taylor also testified that
“Callahan told everyone present that the VEBA Plan had beenapproved by the
[IRS].” (Doc. 183-2, Taylor Aff., ¶ 4).Billy Wilks testified that besides
the discussion about contributions to the plan being taxdeductible, they
“talked in general about the VEBA plan” and “one of the things that came up
inthat second meeting was that there was a slot… open in this VEBA plan or
organization inCalifornia… and we needed to take advantage of that slot
being open and get into thatCase 1:07-cv-00883-CG-N Document 223 Filed
11/12/10 Page 10 of 5511program… there seemed to be an urgency for us to
do that.” (Doc. 176-1, B. Wilks Dep., p. 9).He also testified that they
“talked about insurance would be part of the plan” in that Mr.
Callahan“mentioned AIG being the participant in this plan and that they
would be the ones furnishing theinsurance and that that was part of the
plan”, specifically “that the plan would have a lifeinsurance policy as part
of the total package.” (Id., pp. 9-10). Furthermore, “in generalities,
[theWilkses] were told that the contributions we made would go into the VEBA
trust and be investedon our behalf and grow to the point that – I recall the
five-year sequences” that the Wilkses“would contribute for five years” and
“[t]hen there would be a five-year period when it would –[the Wilkses] would
not contribute anymore, but it would grow.” Then they were told “after
the10-year period, John and Mike could start drawing their retirement,
dividend checks from it” andthat “Sea Nine Associates… were the
administrator of the VEBA trust and that they invested themoney, and then
the dividends and all would grow from their investment capabilities.” (Id.,
pp.10-11). Billy further stated that in general “the loan just really was
explained to us then. Thatbasically what you were doing was borrowing from
your insurance policy.” (Id., p. 11). Markthereafter told the Wilkses “that
a group would be coming in from California to--- that a meetingwas being set
up, and that they would be coming in later to explain in more detail the
entireprogram.” (Id., p. 12). Lastly, Mark told the Wilkses that they needed
to undergo physicalexaminations “to get the VEBA moving.” (Doc. 159-4, J.
Wilks Dep., p. 9).The health exam application was obtained from AIG. (Doc.
172-1, Lalat Dep., p. 10).The Wilkses took medical exams in or around March
2004. (Doc. 176-1, B. Wilks Dep., p. 13).The medical information, along with
financial and other background information on the Wilkses,was gathered
through Lalat’s office. Lalat testified that it was “impossible” that he could
havesigned up J&M without AIG knowing about it. (Doc. 172-1, Lalat Dep.,
pp. 10-11; Doc. 185-2,Case 1:07-cv-00883-CG-N Document 223 Filed 11/12/10
Page 11 of 5512pp. 12-17). One of the medical forms identify the “agent
name”: as “Lalat Pattanaik” and the“agency name” as “IPS Enterprises.” (Doc.
185-2, p. 19). The Profile Services form for AIGlists the “Agency” as “IPS
Enterprises.” (Doc. 185-2, pp. 23-24).On April 1, 2004, J&M had a
special meeting of the board of directors in which theyadopted the VEBA
Master Plan and Master Trust presented by John Wilks and directed John
“onbehalf of this corporation to execute this agreement adopting the Master
Plan and Master Trust”and also “to direct Union Bank of California, as
trustee under the Master Trust, pursuant to theMaster Plan, to acquire life
insurance Contracts (as defined in the Master Plan) issued by[AIG]…” (Doc.
185-2, p. 8-10). On April 5, 2004, John Wilks signed as president of J&M
anadoption agreement “adopt[ing] the California Building Supply Wholesalers’
and Contractors’League Voluntary Employees’ Beneficiary Association Master
Plan and its companion MasterTrust” (“Adoption Agreement”). (Doc. 185-2, pp.
2-5). In the Adoption Agreement, J&Magreed to make “an initial deposit
of $1,012,000.00 to the Master Trust” and that the “Benefits tobe provided
under the [Master] Plan shall be fully funded.” (Id., p. 2). The Adoption
Agreementalso provides that J&M is entitled to “[a] life Benefit equal
to 12.84 times the ParticipatingEmployee’s Benefit base shall be provided to
each Participating Employee” but that “OtherBenefits are not provided by the
Plan.” (Doc. 185-2, p. 3). In regards to the duration of the lifebenefits,
the Adoption Agreement states that…the Life Benefit shall consist only of
current protection, containing noeconomic value (such as paid-up or cash
surrender value) extending beyond onePlan Year, irrespective of whether the
provision of such Benefit is funded by theTrustee pursuant to the Master
Plan with term or ordinary life Contracts. In thelatter instance, the
Participant shall have no rights in the Contract other than to thedeath
Benefit protection. Accordingly a Participant shall have no rights in
theContract other than to the death Benefit protection…(Doc. 185-2, p.
4).Case 1:07-cv-00883-CG-N Document 223 Filed 11/12/10 Page 12 of
5513The Adoption Agreement also provides that the “Benefits under the
Plan are limited” in that“[a]n Employee’s Benefit base shall be such
Employee’s compensation, with adjustment only asprovided in [Master] Plan §
5.03.” (Doc. 185-2, p. 3). Lastly, the Adoption Agreement containsthe
following provision:The Participating Employer assumes full responsibility
for evaluating the taxconsequences of adopting the Plan, and the
participating Employer shall holdharmless the Trustee and the Administrative
Service Provider from any liabilityregarding such matters.(Id., p.
5).The Master Plan, which was adopted by J&M as stated above, provides
that the initialcontribution made by J&M, and any other contributions,
and any earnings or accruals thereonshall be invested by the Trustee in
“Contracts to the extent provided here.” (Doc. 159-9, p. 11).A “Contract” is
defined as “[a] policy issued by a legal reserve life insurance company, with
orwithout an insurance element.” (Id., p. 4). Section 5.01 of the Master
Plan states that “theBenefits provided by this Plan are stated in the
Adoption Agreement” subject to the limitationsof section 5.02 of the Master
Plan (Doc. 159-9, p. 12). Section 5.02 provides that “[t]he[Master] Plan may
provide only Life and other Benefits.” (Id.). The Master Plan
defines“Benefits” as “life and other welfare benefits as may be adopted by
the Participating Employerpursuant to the Adoption Agreement attached hereto
and made part hereof.” (Id., p. 3). TheMaster Plan defines “life benefits”
as:a Benefit including a burial benefit or a wreath payable by reason of the
death of aParticipant. A “life benefit” may be provided directly or through
insurance. Itgenerally must consist of current protection, but also may
include a right toconvert to individual coverage on termination of
eligibility for coverage throughthe Plan. A “life benefit” also includes the
Benefit provided under any lifeInsurance Contract purchased directly from
the Plan by a Participant.The “life benefit” may be paid in a form of
survivor income Benefit to a namedBeneficiary or if no Beneficiary is named,
[then] to the estate of the deceasedCase 1:07-cv-00883-CG-N Document 223
Filed 11/12/10 Page 13 of 5514Participant. Such Benefit may be payable
upon the death of the Participant in aseries of monthly payments not to
exceed 120…Furthermore, the Master Plan states that “[e]xcept as provided by
applicable law, the Insurer[AIG] shall not be deemed to be a party to this
Plan and its sole obligations shall be measuredand determined solely by the
terms of the its Contracts and other agreements executed by it.”(Doc. 159-9,
p. 17). The Master Plan further provides that “[a]ny Participating Employer
shallhave the right to terminate its participation in this Plan (as a
Voluntary Termination) bydelivering written notice of termination to the
Committee to be forwarded to the Trustee withproperly authorized written
directive.” (Id., p. 20). It further stated that “[t]o be eligible
toterminate such Participating Employer’s participation in the Plan, one of
the following eventsmust have been encountered by such Participating
Employer: (a) Adverse businessconditions….” (Id.).Also on April 5, 2004,
John Wilks signed a document entitled “Disclosure of Method ofBenefits Under
the Proplan VEBA Welfare Benefit Trust.” In that document, he and
J&M“acknowledge that it has been disclosed that all of the obligations
under the plan will be appliedfor and provided by insurance and or annuity
policies issued by legal reserve insurancecompanies.” They also “understand
and agree fully that benefits thereby provided, will begoverned solely by
and limited to the provisions contained in the insurance policies.” In
otherwords, the “[p]olicies may be converted upon employee withdrawal due to
hardship if theminimum funding period has been met.” They also “acknowledge
that the beneficiary of thepolicy(ies) will be the Plan Trustee” and that
“[t]he beneficiary of the Employee properlyrepresented by the Employer has
been nominated by the member participants through separatebeneficiary
nomination forms.” Lastly, they note that “since this plan having been adopted
bythe Employer provides only death benefits, the plan may not be used by the
employer forCase 1:07-cv-00883-CG-N Document 223 Filed 11/12/10 Page 14 of
5515purposes of deferred compensation and/or for other purposes
including, but not limited to buysellagreements.” (Doc. 159-7, p.
2).John Wilks testified that all the above documents were in their
possession at their office,that they had an opportunity to read all of these
documents, and that they had the opportunity to“get any sort of assistance
[he] deemed necessary with respect to understanding them before [he]signed
them.” (Doc. 159-3, J. Wilks Dep., pp. 25-26).On or around May 17, 2004, the
Wilkses, Shane Switzer, Justin Taylor, G.B. Taylor, andothers met with Lalat
and Mark Callahan at the Grand Hotel in Point Clear, Alabama (“GrandHotel
meeting”). (Doc. 159-4, J. Wilks Dep., pp. 10-11). At that meeting, Lalat and
Markpresented to the Wilkses and other potential clients various aspects of
the VEBA plan, includingproviding them a due diligence package. (Id.; Doc.
159-3, J. Wilks Dep., p. 11; Doc. 174-1,Callahan Dep., p. 8). The due
diligence package contained nine sections: (1) two VEBA articlesfrom
accounting journals; (2) a package submitted to AIG for review and approval,
including acopy of one of the nine master trusts that IPS has; (3) a copy of
each of the 9 IRS Letters ofDetermination; (4) a technical memo by an
employee benefits/ERISA consulting firm; (5) three“sample” individual “More
Likely than Not” legal opinions obtained by three separate clients;(6) ten
separate legal opinions on the Southern California Trusts over the last 17 years
covering arange of topics including deductibility; (7) documentation from
all three major IRS audits in1994, 1996 through 1998, and 1998 through 1999;
(8) other code sections, revenue rulings,PLR’s, general counsel memorandum,
case law, etc.; and (9) information regarding insurancecompany/product
used/legal opinion on the product. (Doc. 159-6, p. 3). Under the table
ofcontents, the package provided the following disclaimer:This material
is designed to provide accurate and authoritative information withregards to
the subject matter covered. It is prepared with the understanding thatCase
1:07-cv-00883-CG-N Document 223 Filed 11/12/10 Page 15 of 5516IPS is not
engaged in rendering legal, accounting, or other professional services.If
legal or other assistance is required, the service of a competent
professionalshould be sought.(Doc. 159-6, p. 3).The package
specifically contained a letter from the Reish law firm dated December
20,2002 , which addressed a variety of issues relating to the VM5 policy.
(See Doc. 183-3). In part,the Reish law firm letter states that if a policy
holder intends to purchase the VM5 policy in thefifth year, “they do so at
using the reserve value rather than the cash surrender value” whichwould
comply with IRS statements in Notice 89-25. (Doc. 183-3, p. 13). The
package,however, did not contain the January 27, 2004, letter from Reisch to
Elliott, which relayedReish’s concerns about the VEBA plan in light of the
final 419 regulations, and it did not containa copy of the final 419
regulations which were issued in July 2003. (Doc. 172-1, Lalat Dep., p.10;
Doc. 173-1, Lalat Dep., pp. 33 & pp. 38-39). When asked why these materials
were notincluded in the package, Lalat testified that “it was purely an
operational issue, because thesepackages – probably 10 of these books were
already made before year-end, and that’s why.”(Doc. 173-1, Lalat Dep., p.
33).Also included with the due diligence package was the IPS VEBA brochure
and atechnical guide provided by AIG specifically designed for advisors.
(Id.). One of the documentsprovided to the Wilkses stated that the plan’s
assets would belong to the VEBA Trust and thatthose assets would be used to
purchase the life insurance policies. (Doc. 159-2, p. 11). Thatdocument also
states that “[t]he assets (including cash, insurance, annuities) do not belong
to anysponsoring business or any of the participating employee/owner until a
triggering event such asdeath or plan termination causes benefits to be paid
or assets to be distributed to them.” (Id.).Billy Wilks testified that at
the meeting, there were “AIG banners… all over the room.”Billy also
testified that Lalat “basically told us his experience, more or less qualified
hisCase 1:07-cv-00883-CG-N Document 223 Filed 11/12/10 Page 16 of
5517existence.” After this, he “got into the program, the nuts and bolts
of the program and how itworked, and that the investment was secure. It was
tax exempt. It would earn money and atsome point you could go in and start
taking the money out tax free.” He also stated that “theprogram was
flexible. It was designed to pretty well accommodate anyone that wanted
toparticipate in it. Contributions could – were flexible. Obviously, the
amount that you put indetermined how much you could take out later.” Billy
recalled a particular instance when“Shane Switzer, our CPA, ask[ed] the
specific question if my client, J&M, participates and ayear or a year
and a half into the program, they find they can’t make contributions,
whathappens” and that “Lalat’s response was no problem. It’s very flexible.
You can reduce yourcontributions, even stop them for a while, because
there’s a hardship rider in the program.”(Doc. 176-1, Wilks Dep., pp. 14-15;
see also Doc. 185-2, p. 1).44 G.B. Taylor, who was also in attendance at
this meeting, testified as to the followingfacts:At this presentation,
Lalat Pattanaik told everyone that the VEBA Plan wasapproved by AIG. The
presentation involved illustrations and written materialsand discussing the
advantages of enrolling and participating in the VEBA Plan.Lalat Pattanaik
told everyone that, by enrolling in the VEBA Plan, they wouldreceive
lifetime tax-exempt benefits, tax-free money to be paid to thebeneficiaries
after a period of ten years, the Plan had no minimum or maximumfunding
requirements and that the insurance products would be distributed to
theparticipants at the end of a period of time at a substantially-reduced
surrendervalue; and the policies would be converted to variable life
insurance policies at asubstantially-increased value at a later time. He
told everyone that the AIGinsurance policies, which would fund the VEBA
Plan, were suitable for thispurpose and had been developed by AIG for the
purpose of funding the VEBAPlan.Lalat Pattanaik told everyone that the
VEBA Plan was an excellent way topurchase life insurance in a program
designed as a tax shelter, which offered taxfreewithdrawals as deferred
compensation plus permanent life insurance. LalatPattanaik told everyone
present that they would be entitled to current income taxdeductions for all
contributions they paid into the VEBA Plan and that it was nota Listed and
Reported Transaction since the Plan had been approved by the
IRS.(Continued)Case 1:07-cv-00883-CG-N Document 223 Filed 11/12/10 Page
17 of 5518Also at this meeting, a pamphlet dated February 8, 2004, and
titled “Presentation to J&MAssociates, Inc.”, part of which was prepared
using AIG software, was given to the Wilkses.(Doc. 173-1, Lalat Dep., pp.
21-22). This illustration was provided to the Wilkses which showedthat the
Wilkses would make a total contribution of $5,058,600 in the first five years,
an amountwhich would result in $2,023,200 “[t]ax savings based on
contribution.” In the sixth year, theillustration provides that John and
Mike would “buy out” the policies for $498,938 and that theywould have no
taxes in the sixth year which would result in a total cost of $3,533,738.
TheyLalat Pattanaik also told everyone at the meeting that the insurance
policies to beissued later contained a hardship rider, which would provide
flexibility in theamount of premiums to be paid when it was invoked, and the
participants wouldbe permitted to restructure payments by suspending or
reducing payments if theparticipants suffered any kind of economic hardship;
and that this would continueuntil the participants could resume payments at
a level to be afforded under thecircumstances or could terminate the VEBA
Plan with all benefits beingdistributed to the employees…I recall that
Harvey Morris asked Lalat Pattanaik how much money would be leftto
participants at the end of the year, if he participated. Pattanaik told
HarveyMorris that the money was always safe, and that he could not lose
money in thisprogram. Woody Ramsay asked Mr. Pattanaik what would happen if
he could notmake payments in the future for some unknown reason. Pattanaik
told Mr.Ramsay that, if he could not make payments in the future, he would
be able tostop making them; and he would remain in the VEBA Plan at the
level of hiscontributions, and that he would never lose the money he had
already contributedinto the VEBA Plan. Lalat Pattanaik told Woody Ramsay
that the program wasdeveloped by AIG, and it was guaranteed that he would
not lose any money hepaid into the Plan.(Doc. 183-2, Taylor Aff., pp.
10-15, ¶ ¶ 5-7).Mr. Lyman Woodside Ramsay, who is the owner and president of
Gulf Equipment Company andwho was also in attendance at the meeting,
testified similarly. (See Doc. 183-2, Ramsay Aff.,pp. 16-18, ¶ ¶ 2-4). Mr.
Callahan also stated it was his “understanding and interpretation” thatLalat
had told the people at the meeting that the IRS had approved J&M’s specific
plan. (Doc.174-1, Callahan Dep., p. 10). Billy confirmed that the plan “was
presented to us as a legal IRSexempt, approved retirement plan. That’s
basically what we understood when we came out ofthe meeting.” (Doc. 176-1,
B. Wilks Dep., p. 17).Case 1:07-cv-00883-CG-N Document 223 Filed 11/12/10
Page 18 of 5519would then in turn receive $19,772,321 in
“[p]ost-retirement benefits” and $6,098,213 in “DeathBenefit Assets (after
disbursements)” for a “total tax free benefits” in the amount of$25,870,534.
(Doc. 186-1, p. 10).After the meeting at the Grand Hotel, the Wilkses with
Shane Switzer, who is their CPA,met privately with Lalat, Brady Richardson,
and Mark Callahan “just more or less repeating thesame questions, getting
the same answers, and verifying that – what we could do.” (Doc. 176-1,B.
Wilks, p. 18-19). John Wilks testified that thereafter he did some “searches on
the computer”but he “found it, you know, to be somewhat burdensome… to try
and figure out what I wasreading and comparing to what we heard at the
hotel.” He stated that he “relied essentially onwhat was said at the meeting
and the information that was handed out to us.” (Doc. 159-4, J.Wilks Dep.,
p. 14). He further testified that these internet searches did not cause him to
not wantto participate in the VEBA Plan. (Id., p. 15).In June 2004, the
Wilkses met with Michael Mangawang for the first time, MarkCallahan, Brady
Richardson and Shane Switzer at Mr. Switzer’s office in
Pascagoula,Mississippi, to discuss J&M’s participation in the VEBA Plan.
(Doc. 159-4, J. Wilks Dep., p.13; Doc. 174-1, Callahan Dep., p. 4). Billy
Wilks testified that Mr. Callahan had called him and“said that they had
another expert that they wanted to send in to meet with us again and more
orless make us feel more comfortable about the program” and that person went
“by the name ofMangawang.” (Doc. 176-1, B. Wilks Dep., p. 20). He stated
that “we went over more or less arepeat performance of the presentation and
the tax exempt and the flexibility and the legality andwhat a great program
it was” and Mangawang “just more or less substantiated what had beentold us
already to an extent.” (Id., p. 21). At this point, the Wilkses had already
completed theapplications for the life insurance but had not yet paid any
money. (Id.).Case 1:07-cv-00883-CG-N Document 223 Filed 11/12/10 Page 19 of
5520On June 21, 2004, J&M made an initial payment of $400,000 to
“Union Bank of CAFBO J&M Assoc. Inc. VEBA” by express mail to Lalat.
(Doc. 187-2, p. 9-10). J&M then paid$10,000 to an attorney in California
named Fredrick A. Romero to draft a legal opinionregarding whether J&M’s
deductions relating to the VEBA Plan would comply with the InternalRevenue
Code. (Doc. 159-4, J. Wilks Dep., pp. 27-28). On August 14, 2004, Mr.
Romeroprovided a legal opinion stating in part that “[i]f the IRS should
challenge the deductibility ofcontributions made by J&M Associates, Inc.
to the VEBA program, for the benefit of eligibleemployees, it is more likely
than not, that J&M would prevail on the following issues: 1. TheVEBA
program, is one that is a program described under IRC 501(c)(9) and IRC
419A(f)(6) and2. J&M Associates, Inc. is entitled to a current deduction
for its entire contribution into theVEBA program.” (Doc. 187-3, p. 1). Mr.
Romero stated that “[b]y the term ‘more likely thannot’ we mean that there
is a greater than 50% likelihood that the employer’s position would beupheld
by the Courts if challenged by the Internal Revenue Service.” (Id., p. 2).5 Mr.
Romerofurther stated that he reviewed the following documents “in connection
with our review of thededuction rule applications in formalizing our opinion
under substantial authority:1) The Plan documents which include the Adoption
Agreements and the Plan andTrust Agreements2) Various notices to
employees concerning eligibility, participation, and benefits;5 Rather than
using the “more likely than not” language in this letter, Mr. Romero
statedin an earlier draft that:The inclusion of a position in this
letter is not conclusive as to whether or notsubstantial authority exists
with respect to the taxpayers position. If however,there is litigation or
audits as to whether there is substantial authority, and if acourt
subsequently decides in favor of the IRS holding that there is no
substantialauthority for the position, then the relevant penalty would
apply.(Doc. 188-2, p. 2).Case 1:07-cv-00883-CG-N Document 223 Filed
11/12/10 Page 20 of 55213) Copy of Committee and Administrator
appointment and duties;4) Insurance Policies;5) Illustration provided to
J&M Associates pursuant to its adoption of the VEBA;6) IRS letters of
determination; and7) Opinion Letter dated June 4, 2004 from Reish, Luftman,
Reicher & Cohen(Doc. 187-3, p. 16-17).In the June 4, 2004, opinion
letter, Bruce L. Ashton was “asked [by Ken Elliott]… to commenton whether
the several Voluntary Employees’ Beneficiary Associations… administered by
SeaNine…. comply with the requirements of Treasure Regulation Section
1.419A(f)(6)-1 issuedunder Internal Revenue Code… section 419A… The final
regulations were issued on July 17,2003.” He stated that his “views
expressed in this letter are based on a review of the finalRegulations and
on the Documents in the form provided to you in draft (with certain changes
wehave discussed).” He concluded that “[a]ssuming the VEBAs are operated in
a mannerconsistent with the draft documents, which you have confirmed to me
you intend to do, I believeit is more likely than not that the VEBAs would
be viewed by the IRS as complying with therequirements of the Regulations.”
(Doc. 187-4, p. 1). He also maintained that he “believed it isunlikely that
the VEBAs would be considered ‘listed transactions’ so long as they are operated
ina manner consistent with the Documents.” (Id., p. 6). When asked whether
the “more likelythan not” language was “an acceptable level of risk for
J&M, John Wilks testified that “Yeah.Yes, it was.” (Doc. 159-3, pp.
28-29).On August 5, 2004, and August 20, 2004, respectively, AIG issued
policies insuring thelives of Johnny and Mike Wilks, pursuant to the
applications signed by the Wilks brothers.(Doc. 159-11 & 159-12). A
document entitled “Policy Assembly Instruction Sheet” for JohnnyWilks and
Mike Wilks lists the “Agency/Agent No.” as “B0293SH/KEN ELLIOTT” and theCase
1:07-cv-00883-CG-N Document 223 Filed 11/12/10 Page 21 of 5522mailing
address as “IPS-Tracey Roberts.” (Doc. 187-2, pp. 3 & 5). Another document
entitled“AGENT CARD”, which also has AIG’s name on the top and bottom of the
document, lists the“insured” as Johnny Wilks, the agency as Innovative, and
agents as Laban and Ken Elliott.(Doc. 187-2, p. 6). On August 23, 2004,
J&M sent a check for $300,000 to “Union Bank of CAFBO J&M Assoc.
Inc. VEBA” via Lalat. (Doc. 187-2, pp. 11-12). On September 28, 2004,AIG
issued a policy insuring the life of Billy Wilks, pursuant to the application
signed by Billy.(Doc. 159-13). In September 2004, the Wilks received copies
of the policies. (Doc. 159-14;Doc. 176-1, B. Wilks Dep., p. 22).John and
Mike Wilks’ policies identify the owner of the policy as “Union Bank of
CA”,the product name as “Platinum VM 5+” and also references a “Hardship”
rider. (Doc. 187-1, p.5; Doc. 159-11, p. 32). The policy also states that
the “Exchange Option” does not applybecause the policy was issued to a
“Qualified Plan”, but if the policy is “sold or distributed fromthe Plan”,
the Exchange Option becomes available on the first day of the tenth policy
year.(Doc. 187-1, p. 3). The hardship rider states that “the Owner may apply
for an exchange in theevent of Substantial Business Hardship.” (Doc. 159-16,
p. 2). In determining “SubstantialBusiness Hardship,” the rider states that
“the Company shall base its determination ofSubstantial Business Hardship on
a number of factors including, but not limited to:(1) The Owner’s business
which is being operated at an economic loss (or thebusiness of the employer
sponsoring the Qualified Plan if the Owner is a Trustee);(2) The level of
sales and net profits or losses;(3) The reasonable expectation that premium
payments can be continued only ifthe exchange is granted.(Id.).To
become eligible for a hardship exchange under the rider, “the Owner must furnish
evidencesatisfactorily to the Company that:Case 1:07-cv-00883-CG-N
Document 223 Filed 11/12/10 Page 22 of 5523(1) The Owner is unable to
make premium payments without a SubstantialBusiness Hardship; and(2) The
failure to make premium payments would be adverse to the interests ofthe
Owner.(Id., p. 3).On December 24, 2004, J&M sent another payment of
allegedly $400,000 by expressmail to Lalat. (Doc. 187-2, p. 12-13).6 In the
fall of 2005, J&M began to experience a declinein cash flow due to
Hurricane Katrina and was anticipating a problem making contributions.(Doc.
176-1, B. Wilks Dep., p. 24). Billy Wilks testified that he “discussed that with
Mark. AndMark said, well, let me get Lalat to call you. And Lalat did.” When
Lalat called Billy’s office,Billy testified that “we put it on a speaker
phone. John, Mike, and myself were there. I don’trecall if Mark was on the
conference call or not… we did have a conversation with Lalat, and wetold
him about our potential problems.” (Id.). Specifically, they “asked… about the
hardshiprider that we had been told was part of the plan. And Lalat said,
well, we’re not near to a pointthat we need to kick in the hardship rider.
Don’t worry about that. And that was his statementon that particular
question.” (Id., pp. 24-25). Billy also recalled Mike Wilks asking Lalat
“onthat phone conversation… what about the million dollars that we have in
the plan right now,what is the status of it, because we don’t have any
reckoning of that. We don’t have anyreports.” Billy stated Lalat responded
that the “million dollars is fine. It’s in the system. It’searning money as
we speak. Don’t worry about your million dollars. It’s there. It will
alwaysbe there. That was his statements.” (Id., p. 25). Billy further
testified that when they expressedtheir concerns that they “may not be able
to put a million dollars in for ‘05”, Lalat asked “how6 On September 11,
2004, John Wilks signed a policy illustration that was prepared byAIG. (Doc.
159-15, p. 8). On that same date, John and Mike Wilks signed a policy
illustrationprepared by IPS. (Doc. 189-1, pp. 1-6).Case
1:07-cv-00883-CG-N Document 223 Filed 11/12/10 Page 23 of 5524much can
you put” and they responded “maybe a third of that or half of it” and that
they“weren’t sure because we had outstanding invoices that hadn’t been
paid.” (Id., p. 25-26). Lalatthen told them that he was “coming into Mobile,
Alabama in a week or two and asked if theycould meet.” (Id., p. 26).On
October 3, 2005, Lalat wrote an email to Tracey Roberts at IPS that
stated:We need to help our boys at J&M associates get back on track,
they have had asevere setback due to a combination of things including the
recent Hurricane –with damage to part of their operations and destruction of
their offices…I need to know:what relief – AIG is providing storm relief
afflicted clients.I am particularly concerned since [] Mike and John have
premiums due i[n] the$450K range and can only pay partially until they get
back on tract [sic] at yearend. What is the best deal that we can work out
for them.Please see what premiums are due, what time relief we can get for
them withoutany payment, what are our options to temporarily convert them to
quarterly till thefirst quarter of 2006 and then what payment plan can we
set up for them up withto give them as much time as we can possibley [sic]
provide within reason toallow them to get their stuff back in order over
th[e] next 3-6 months.… and before this goes to anyone – please discuss with
Peter [Mordin].(Doc. 189-4, pp. 4-5).Tracey shortly thereafter forwarded
Lalat’s message to Peter Mordin, stating “[l]et me know ifthere is anything
we can do about their premiums.” (Id., p. 4). Peter then forwarded the email
toMark McGuire who is the Senior Vice President of Insurance Services, and
the email was thenforwarded to several other employees at AIG. (Id., pp.
2-4). Cheri Bourgeois, who is Managerof Customer Care Services/Agent Call
Team, ultimately responded to Lalat, Peter Mordin, andothers on October 5,
2005, stating that:On 9/19, Di with Union Bank contacted me on the [the
Wilkses’ policies]. Thefirst 30 day extension has been granted – extension
currently until 11/5. At thatCase 1:07-cv-00883-CG-N Document 223 Filed
11/12/10 Page 24 of 5525time both of these policies were suspended in
our system for nothing wouldhappen to them…(Id., p. 1).Lalat
responded by email that he “will be visiting the Wilks in the South in a couple
of weeks toevaluate how badly they were impacted and help them make
arrangements to get back on track totheir original funding levels as soon as
they can – hopefully by year end or by January.” (Id.).Shortly thereafter,
Lalat, Mark Callahan, and the Wilkses met at a coffee shop inFairhope,
Alabama. (Id., p. 27). Billy testified that Lalat and Mark reassured them “that
it wasnot time to invoke the hardship rider” and “that the contributions we
made were safe, secure,earning us money” and testified that Lalat and Mark
stated “[l]et’s just talk about what you cando, not what you can’t do, and
so forth and so on. So it was just a rehash of the telephoneconversation.”
Billy stated that “the decision was made then that we could at some
short-termfuture date make some more contributions in ’05, which we did.”
(Id., pp. 27-28). On October31, 2005, Lalat sent an email to Peter Mordin,
Cheri Bourgeois, and others stating that he hadmet with the clients and
“[t]hey are still under financial stress as a result of the couple of
eventsthat they described in their letter and which I have conveyed to you.”
He further stated that theWilkses “are attempting to catch up in the middle
of December with a contribution amount thatwould carry them till Feb and
then they will move forward as planned from that point onwards.So at this
point in time, we need to buy time till December 5th.” He maintained that he
“willcontact them in mid November to see if they can make the balance of the
contribution by end ofNovember to bring them up to date. If they cannot, we
may have to do this one more time andthey have committed that they will get
me the needed contribution by Mid December.” (Doc.189-4, p. 6). J&M made
two more contributions of $110,00 and $150,000 in September andDecember
2005, respectively. (Id., p. 23).Case 1:07-cv-00883-CG-N Document 223 Filed
11/12/10 Page 25 of 5526J&M took deductions on its tax returns for
its VEBA Plan contributions in 2004 and2005. (Doc. 159-20, Switzer Dep., pp.
4). Shane Switzer, as J&M’s certified public accountant,prepared
J&M’s tax return documents and John Wilks signed the documents. (Doc. 159-4,
J.Wilks Dep., p. 23). J&M relied on Mr. Switzer as its CPA to advise the
Wilkses with respect totheir decision to participate in the VEBA. (Doc.
159-3, p. 13). In February 2006, Mark Callahancame to J&M’s office and
talked to Billy Wilks. Billy testified that:Mark appears in my office one
morning and in kind of a state of confusion andshock, looked like to me. His
eyes were dilated almost, and he was talkingincoherent. I had never seen him
like that before. And I said, what’s the problem.And he said we’re all in
big tax problem trouble. If you all don’t catch yourcontributions up, you’re
going to be hit with income tax on all this money, themillion dollars you
have put in.And I said, well, you know, why is this all of a sudden a
problem. It wasn’t aproblem a month ago. Well, it’s just – that’s just the
way the IR – the thing is. Ifyou all get out of the program or it’s
terminated or your policies lapse, then you’regoing to have an IRS problem.
You’re going to have to pay all these back taxesand everything.And I
said, well, that’s not what we were told. That’s not how the program
waspresented to us. That’s not what you and Lalat told us at the coffee shop
meeting.It’s not what you said when we made the last payment and so
forth.But he was – he even got to the point, he said, can’t you borrow a
million dollarsto put in this VEBA program. I said, well, it’s not a
question of whether I can ornot. I’m not. You now, I’m not going to borrow
money to put in the program.(Doc. 176-1, B. Wilks Dep., pp. 29-30).Billy
stated that “this is when things started to unravel, and that’s when I tried to
get in touchwith Lalat and others, because I had lost a little confidence in
Mark after that meeting.” (Id., p.30).Mike had thereafter attempted to
contact Lalat, and Lalat wrote an email to Mike, Johnand others stating
that:I want you to remember that we work for you – our clients and will do
what wecan to make sure that there is whatever amount of damage control
possible.Case 1:07-cv-00883-CG-N Document 223 Filed 11/12/10 Page 26 of
5527Having said that, we have never had a client this early in the
plan’s life need tomake an amendment.With regards to what was told and
what was not – a lot transpired over that periodof time – including multiple
parties, phone calls and conversations. The reasonthat back payments were
not discussed was because it applies to such a veryspecific set of facts –
that it is not the normal course of discussion in an insurancesales process.
Obviously having a natural disaster and other things go astray all atonce
are also not normal; consequently the outcome and potential solutions maybe
something “not normal” as well.It is common in insurance to make back
payments to catch up with skippedpayments; but the catch is that you would
have to do all the meds and so forth(“reinstatement” of the policy). The
positive outcome is that by making suchback payments in the future – you
preserve the value of what you already havecontributed and simply fulfill
the obligation at a future date for what yourcommitment was.I will get
the answers to you about restructuring the polices (it will literally takeme
a couple of days) as we have NEVER done this – particularly this early in
theplan’s life…Please note, one of the VEBA rules about a reversion to
the employer (J&M) isthat it would cause a 100% penalty tax since you
contributed and expensed thatcontribution as a deductible item for welfare
benefits. Consequently we want toavoid that at all costs.(Doc. 189-1, p.
9).In September 2006, John, Mike, and Billy Wilks talked to Ann Henderson at
AIGregarding their “situation and Lalat Pattanaik’s name and our concern,
but bottom line, Mrs.Henderson was somewhat in the dark about the situation,
didn’t seem to ring a bell with herwhen Mr. Pattanaik’s name was mentioned,
nor our concern.” (Doc. 159-3, J. Wilks Dep., p.31). On October 11, 2006,
Ms. Henderson sent a letter to John Wilks as a “follow up to
previouscorrespondence regarding your concerns about” the policies. (Doc.
159-21). The letter providedthat:The Company has reviewed the concerns
you have expressed regarding thesepolicies, where were purchased as the
funding vehicle for the VoluntaryEmployee Beneficiary Association (VEBA).
Please note that the Company is notthe plan provider and our involvement is
limited to the role of that of the issuingCase 1:07-cv-00883-CG-N Document
223 Filed 11/12/10 Page 27 of 5528life insurance company for the
policies. Furthermore, these policies are owned byCalifornia Building Supply
Wholesalers’ and Contractors’ League VEBA WelfareBenefit Plan and Trust
(“the “VEBA Plan”). As such, any requests for policychanges must come from
the owner. In the interest of providing informationresponding to the
complaint you filed with both the Mississippi Department ofInsurance and
with the Company, we are responding to you directly with a copyto the Trust.
Generally speaking, the Company communicates solely with theowner of
contracts issued by it.You need to understand that because you are not the
owner of the policies anyconcerns regarding the VEBA Plan including
questions concerning restructuringof the Plan itself and questions
concerning the amount of funding required for theplan should be directed to
the administrator and/or trustee of the VEBA Plan,Union Bank of California.
Any restructuring of the said plan must be approvedby the administrator and
the Trustee.…The Company understands that you can no longer afford the
premiums on thesepolicies and are therefore requesting that the policies be
reconstructed in order tolower the premiums necessary to continue the
policy. [The Policy] does include aBusiness Hardship Rider. The rider
enables the Owner to apply for an exchangein the event of substantial
Business Hardship. Exercise of the rights under thisrider may require
amendment, or termination, of the qualified plan…In order for the Company to
exercise this rider, the Company will require awritten request signed by the
owner along with evidence that your business hasexperienced a hardship and
is unable to make premium payments without asubstantial business hardship or
that the failure to make premium payments wouldbe adverse to the interests
of the Owner.The Company has enclosed several projections illustrating
exchanges of thepolicies through exercise of the rider. These illustrations
reduce the face amountof coverage ultimately resulting in a decreased
premium. The Companyencourages you to discuss these options, as well as your
needs, with theAdministrator to determine how they may affect the VEBA Plan.
You may wishto consider seeking the advice of a qualified professional who
can advise you ofany tax consequences that you may experience….At the
present time, premiums are due… and if not paid the policy will
terminatewithout value and will no longer provide any life insurance
coverage. The plantrustee and administrator need to advise the Company
within two weeks from thedate of this letter, by October 25, 2006, if they
will exercise the business hardshiprider and which policies they intend to
select for the exchange…(Doc. 159-21, pp. 2-4).Case 1:07-cv-00883-CG-N
Document 223 Filed 11/12/10 Page 28 of 5529AIG did not receive any
written request from the owner of the policies requesting to exercise
thehardship rider. (Doc. 159-22, Henderson Dep., p. 3). On November 2, 2006,
Ms. Hendersonsent a follow-up letter to John Wilks regarding the same issue
described above, and again, AIGreceived no response. (Docs. 159-23 &
159-24).At some point thereafter, the IRS assessed 6707A penalties in the
amount of $400,000against J&M for its failure to disclose on a Form 8886
its participation in a listed transaction.(See Doc. 159-3, J. Wilks Dep., p.
42; Doc. 72). J&M’s expert explains that “[t]he phrase listedreportable
transactions first came out February 28, 2000”, that these transactions are
listed on aNotice 2001-51 and are considered “abusive tax shelters or tax
avoidance transactions”, and that“anyone who is participating in any of the
listed transaction or anything that is the same orsubstantially similar to…
those transactions listed are required to report” that transaction on a“Form
8886.” (Doc. 180-2, Bass Dep., pp. 3-4, 7). If one participates or a taxpayer
participatedin a listed transaction and they file the Form 8886, then they
would not be subject to the 6707Apenalties. (Id., p. 4). However, even if a
person reports said transaction, the IRS may still notallow the deduction
claimed on his or her tax return. (Id.). Listed in the Notice 2001-51
isNotice 95-34. “Notice 95-34, which was published in 1995, identified
certain trust arrangementspurported to qualify as multiple employer welfare
benefit funds exempt from the limits – that’scontribution limits – of
Section 419 and 419A of the Internal Revenue Code.” Thus, “any planthat is
claiming an exemption under 419A(f)(6) would be the same as or substantially
similar tothose identified by the Service as abusive tax shelters and listed
and reportable transactions.”(Id., pp. 7-8). Notice 95-34 identifies four
characteristics of plans that do not qualify for theexemption under
419(f)(6): (1) “ones that provide deferred compensation”; (2) “are
consideredseparate plans for each employer”; (3) “are experience rated”; and
(4) “represent prepaidCase 1:07-cv-00883-CG-N Document 223 Filed 11/12/10
Page 29 of 5530expenses.” (Id., pp. 8-9). Mr. Bass, and it appears the
IRS as well, concluded that the VEBAPlan “incorporated elements from all of
these”. (Id.., pp. 9).AIG alleges that as of September 27, 2009, the
policies insuring John and Mike Wilks areactive but in a reduced paid-up
status. In other words, “[p]ursuant to the policies provisions, theavailable
cash value was used to purchase a fixed amount of death benefit.” AIG further
allegesthat the policy insuring Bill Wilks is still active. Lastly, AIG
states that the “[p]olicies are stillowned by the VEBA Plan.” (Doc. 160, p.
9)(citing Docs. 159-25, 159-26, 159-27).LEGAL ANALYSISI. Summary
Judgment StandardFederal Rule of Civil Procedure 56(c) provides that summary
judgment shall be granted“if the pleadings, the discovery and disclosure
materials on file, and any affidavits show thatthere is no genuine issue as
to any material fact and that the movant is entitled to judgment as amatter
of law.” The trial court=s function is not “to weigh the evidence and determine
the truthof the matter but to determine whether there is a genuine issue for
trial.” Anderson v. LibertyLobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505,
91 L.Ed.2d 202 (1986). “The mere existence ofsome evidence to support the
non-moving party is not sufficient for denial of summaryjudgment; there must
be ‘sufficient evidence favoring the nonmoving party for a jury to return
averdict for that party.’” Bailey v. Allgas, Inc., 284 F.3d 1237, 1243 (11th
Cir. 2002) (quotingAnderson, 477 U.S. at 249). “If the evidence is merely
colorable, or is not significantlyprobative, summary judgment may be
granted.” Anderson, 477 U.S. at 249-250. (internalcitations omitted).The
basic issue before the court on a motion for summary judgment is “whether
theevidence presents a sufficient disagreement to require submission to a
jury or whether it is soCase 1:07-cv-00883-CG-N Document 223 Filed 11/12/10
Page 30 of 5531one-sided that one party must prevail as a matter of
law.” See Anderson, 477 U.S. at 251-252.The moving party bears the burden of
proving that no genuine issue of material fact exists.O'Ferrell v. United
States, 253 F.3d 1257, 1265 (11th Cir. 2001). In evaluating the argument
ofthe moving party, the court must view all evidence in the light most
favorable to the non-movingparty, and resolve all reasonable doubts about
the facts in its favor. Burton v. City of BelleGlade, 178 F.3d 1175, 1187
(11th Cir. 1999). “If reasonable minds could differ on theinferences arising
from undisputed facts, then a court should deny summary judgment.” Mirandav.
B&B Cash Grocery Store, Inc., 975 F.2d 1518, 1534 (11th Cir. 1992) (citing
Mercantile Bank& Trust v. Fidelity & Deposit Co., 750 F.2d 838, 841
(11th Cir. 1985)).Once the movant satisfies his initial burden under Rule
56(c), the non-moving party“must make a sufficient showing to establish the
existence of each essential element to thatparty's case, and on which that
party will bear the burden of proof at trial.” Howard v. BP OilCompany, 32
F.3d 520, 524 (11th Cir. 1994)(citing Celotex Corp. v. Catrett, 477 U.S. 317,
324(1986)). Otherwise stated, the non-movant must “demonstrate that there is
indeed a materialissue of fact that precludes summary judgment.” See Clark
v. Coats & Clark, Inc., 929 F.2d 604,608 (11th Cir. 1991). The
non-moving party “may not rely merely on allegations or denials in[the
non-moving party=s] pleading; rather, its response .... must B by affidavits or
as otherwiseprovided in this rule B set out specific facts showing a genuine
issue for trial.” FED. R. CIV. P.56(e). “A mere ‘scintilla’ of evidence
supporting the [non-moving] party=s position will notsuffice; there must be
enough of a showing that the jury could reasonably find for that
party.”Walker v. Darby, 911 F.2d 1573, 1577 (11th Cir. 1990) (citation
omitted). “[T]he nonmovingparty may avail itself of all facts and
justifiable inferences in the record taken as a whole.”Tipton v. Bergrohr
GMBH-Siegen, 965 F.2d 994, 998 (11th Cir. 1992). “Where the record takenCase
1:07-cv-00883-CG-N Document 223 Filed 11/12/10 Page 31 of 5532as a whole
could not lead a rational trier of fact to find for the non-moving party, there
is nogenuine issue for trial.” Matsushita Elec. Indus. Co., Ltd. v. Zenith
Radio Corp., 475 U.S. 574,587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986)
(internal quotation and citation omitted).II. Breach of ContractIn Count
One of the complaint, J&M alleges, in part, that “AIG breached it’s
agreementwith J&M… by failing to provide suitable insurance policies as
promised, and by failing toprovide the insurance benefits agreed upon, among
other things.” (Doc. 1, ¶ 30). AIG asks forsummary judgment because “AIG’s
“sole obligations were limited to providing insurance on thelives of its
insureds…” (Doc. 160, pp. 14-15; Doc. 192, pp. 17-18). This court finds
AIG’sargument persuasive.In the present case, there are two groups of
written contracts: (1) the Master Plan and theAdoption Agreement and (2) the
insurance policies. In the Adoption Agreement, J&M agreed tomake “an
initial deposit of $1,012,000.00 to the Master Trust” and that the “Benefits to
beprovided under the [Master] Plan shall be fully funded.” (Doc. 185-2, p.
2). On June 21, 2004,J&M made an initial payment of $400,000 to “Union
Bank of CA FBO J&M Assoc. Inc. VEBA”by express mail to Lalat. (Doc.
187-2, p. 9-10). On August 23, 2004, J&M sent a check for$300,000 to
“Union Bank of CA FBO J&M Assoc. Inc. VEBA” via Lalat. (Doc. 187-2, pp.
11-12). On December 24, 2004, J&M sent another payment of approximately
$400,000 by expressmail to Lalat. (Doc. 187-2, p. 12-13). By the end of
2004, J&M had satisfied the initial depositrequirement as stated in the
Adoption Agreement.Case 1:07-cv-00883-CG-N Document 223 Filed 11/12/10 Page
32 of 5533Upon receiving these funds, the Trustee fulfilled his
obligation under the Master Plan andAdoption Agreement to purchase life
insurance for the Wilkses,7 and J&M received the benefitsas provided by
the Master Plan and the Adoption Agreement. Section 5.01 of the Master
Planstates that “the Benefits provided by this Plan are stated in the
Adoption Agreement” subject tothe limitations of section 5.02 of the Master
Plan (Doc. 159-9, p. 12). Section 5.02 providesthat “[t]he [Master] Plan may
provide only Life and other Benefits.” (Id.). The Master Plandefines
“Benefits” as “life and other welfare benefits as may be adopted by the
ParticipatingEmployer pursuant to the Adoption Agreement attached hereto and
made a part hereof.” (Id., p.3). The Master Plan defines “life benefits”
as:a Benefit including a burial benefit or a wreath payable by reason of
death of aParticipant. A “life benefit” may be provided directly or through
insurance. Itgenerally must consist of current protection, but also may
include a right toconvert to individual coverage on termination of
eligibility for coverage throughthe Plan. A “life benefit” also includes the
Benefit provided under any lifeInsurance Contract purchased directly from
the Plan by a Participant.The “life benefit” may be paid in a form of
survivor income Benefit to a namedBeneficiary or if no Beneficiary is named,
then to the estate of the deceasedParticipant. Such Benefit may be payable
upon the death of the Participant in aseries of monthly payments not to
exceed 120…(Id., p. 12).The Adoption Agreement provides that J&M is
entitled to “[a] life Benefit equal to 12.84 timesthe Participating
Employee’s Benefit base shall be provided to each Participating Employee”
butthat “Other Benefits are not provided by the Plan.” (Doc. 185-2, p. 3).
In regards to the durationof the life benefits, the Adoption Agreement
states that7 The Master Plan provides that this contribution, any other
contributions, and anyearnings or accruals thereon shall be invested by the
Trustee in “Contracts to the extent providedhere.” (Doc. 159-9, p. 11). A
“Contract” is defined as “[a] policy issued by a legal reserve lifeinsurance
company, with or without an insurance element.” (Id., p. 4).Case
1:07-cv-00883-CG-N Document 223 Filed 11/12/10 Page 33 of 5534…the Life
Benefit shall consist only of current protection, containing noeconomic
value (such as paid-up or cash surrender value) extending beyond onePlan
Year, irrespective of whether the provision of such Benefit is funded by
theTrustee pursuant to the Master Plan with term or ordinary life Contracts.
In thelatter instance, the Participant shall have no rights in the Contract
other than to thedeath Benefit protection. Accordingly a Participant shall
have no rights in theContract other than to the death Benefit
protection…(Doc. 185-2, p. 4).The Adoption Agreement also provides that
the “Benefits under the Plan are limited” in that“[a]n Employee’s Benefit
base shall be such Employee’s compensation, with adjustment only asprovided
in [Master] Plan § 5.03.” (Doc. 185-2, p. 3).In accordance with the express
terms of the Adoption Agreement and the Master Plan,the Trustee requested
and AIG issued a modified whole life insurance policy on all three of
theWilkses, policies which provided proceeds to the Wilkses’ beneficiaries
in the event of theirdeath. (See Doc. 159-11, p. 2).8 All three of the
policies require the owner of the policy to payAIG a specific amount
annually as premium payments for the policy and these annual paymentsshall
continue till either the insured dies or the insured reaches a
hundred-years-old. Theinsurance policy also provides that AIG shall pay
“death benefit proceeds” to the beneficiary ofthe insured “if the insured
dies prior to the Maturity Date and while this policy is in force” orwill
pay the “cash surrender value” of the insurance policy to the owner of the
policy on thematurity date “if the Insured is living on that date.” (See
Doc. 159-11, p. 2-4).98 On August 5, 2004, and August 20, 2004,
respectively, AIG issued policies insuring thelives of Johnny and Mike
Wilks, pursuant to the applications signed by the Wilks brothers.(Doc.
159-11 & 159-12). On September 28, 2004, AIG issued a policy insuring the
life of BillyWilks, pursuant to the application signed by Billy. (Doc.
159-13).9 For example, the Trustee, who was the owner of the policy, is
contracted to pay$448,818.33 in annual premium payments on behalf of John
Wilks for a maximum of 61 years, adate which is when the life insurance
policy matures.Case 1:07-cv-00883-CG-N Document 223 Filed 11/12/10 Page 34
of 5535In light of the foregoing, this court finds that the undisputed
evidence shows that AIG didnot breach any of the express terms of the Master
Plan, Adoption Agreement, or the insurancepolicies. J&M, however, argues
that the above contract also “consists of the promises made byAIG’s agents
in presentations, in the written documents and AIG-generated illustrations.”
(Doc.170, p. 26; see also Doc. 197, pp. 3-4). This court disagrees. In
Alabama, “[t]he general rule ofcontract law provides that if a written
contract exists, the rights of the parties are controlled bythat contract
and parol evidence is not admissible to contradict, vary, add to, or subtract
from itsterms.” Marriott Intern., Inc. v. deCelle, 722 So.2d 760, 762 (Ala.
1998)(citing Clark v.Albertville Nursing Home, Inc., 545 So.2d 9, 11 (Ala.
1989). However, if the contract isambiguous, parol or extrinsic evidence
will be allowed to clarify the contract. Id.(citingCummings v. Hill, 518
So.2d 1246, 1247 (Ala. 1987). The Master Plan, Adoption Agreement,and
insurance policies are unambiguous as to the rights of the parties. The Master
Plan andAdoption Agreement expressly provide that J&M will send money to
the Master Trust and thatthe Master Trust will, in turn, purchase and then
fund a life insurance policy for John Wilks,Mike Wilks, Billy Wilks, and any
other participating employee. In the present case, the Trusteereceived the
funds and AIG issued three separate policies insuring the lives of John, Mike,
andBilly. The written policies unambiguously state that the Master Trust
must pay a specifiedamount per year till each participant reaches 100 or
dies, and upon those milestones, the policiesprovide benefits to the
beneficiaries of John, Mike, and Billy. Since the alleged promises madeby
AIG’s alleged agents in presentations, in the written documents, and
AIG-generatedillustrations would contradict, vary, add to, or subtract from
the terms of the AdoptionAgreement, Master Plan, and insurance policy, this
parol evidence is not admissible as to thebreach of contract claim. In sum,
this court concludes AIG did not breach the contract byCase
1:07-cv-00883-CG-N Document 223 Filed 11/12/10 Page 35 of 5536allegedly
failing to provide suitable insurance policies as promised or by failing to
provide theinsurance benefits agreed upon since both the Trustee and AIG
provided exactly what wascontracted for in the Master Plan, Adoption
Agreement, and the insurance policies.In addition to the above claim,
J&M also alleges in Count One of the complaint that“AIG breached it’s
(sic) agreement with J&M by failing to restructure said policy under
theVEBA Plan and/or by failing to invoke the hardship rider as promised when
J&M requested suchrelief breached the contract…” (Doc. 1, ¶ 30). AIG
asks for summary judgment as to this claimbecause J&M “has failed to
establish the requisite elements to recover on its claim that [AIG]breached
the VEBA Plan’s hardship rider” as “the hardship rider was not properly invoked”
and“[J&M] never properly exercised the VEBA Plan’s termination
procedures and nothing ispreventing Plaintiff from exercising the Plan’s
provisions now.” (Doc. 160, pp. 12-15; Doc. 192,pp. 17-18). This court finds
AIG’s argument persuasive.First, the Master Plan provides that a party may
terminate its participation in the Plan, butthe party must provide such
request in writing to the Committee which is then forwarded to theTrustee.
(See Doc. 159-9, pp. 20-21). Each participating employer who adopts the VEBA
Planshall irrevocably appoint members to a master committee with membership
set forth in theAdoption Agreement. (Id., p. ). The Adoption Agreement which
was signed by John Wilksappoints Mark Callahan and Brady Richardson as
committee members. (Doc. 185-2, p. 4). J&Mhas not provided, nor can this
court find, any evidence that J&M gave written notice that itwished to
terminate its participation in the VEBA plan. Furthermore, neither the Master
Plan northe Adoption Agreement provides for any other type of
restructuring.Second, as stated above, the insurance policies contain a
hardship rider which states that“the Owner may apply for an exchange in the
event of Substantial Business Hardship” (Doc.Case 1:07-cv-00883-CG-N
Document 223 Filed 11/12/10 Page 36 of 5537159-16, p. 2), but to receive
said exchange, “the Owner must furnish evidence satisfactorily tothe Company
that:(1) The Owner is unable to make premium payments without a
SubstantialBusiness Hardship; and(2) The failure to make premium
payments would be adverse to the interests ofthe Owner.(Id., p.
3).The policies identify the owner of the policy as “Union Bank of CA”,
which is the Master Trust.(Doc. 187-1, p. 5; Doc. 159-11, p. 32). While the
Wilkses had contacted AIG concerning areadjustment to the policies, J&M
has not provided, nor could this court find, any evidence thatthe Master
Trust requested to invoke the hardship rider. In fact, AIG wrote a letter to
J&Mspecifically telling it that the Master Trust must make such a
request, but the undisputedevidence shows that the Master Trust never did
so.In sum, viewing the evidence in a light most favorable to J&M, this
court finds that a trierof fact could not reasonably conclude that AIG
breached the Master Plan, the AdoptionAgreement, or the insurance policies.
All of the parties fulfilled their obligations pursuant to theexpress terms
of the contracts, J&M did not terminate its participation in the Master
Plan, and thehardship rider was never exercised. Therefore, summary judgment
as to Count One is due to begranted.III. Agency RelationshipIn
Counts Two, Four, and Five of the complaint, J&M alleges that AIG is liable
fornegligence, fraud, and fraudulent concealment respectively because Mark
Callahan, LalatPattanaik, Brady Richardson, and Michael Mangawang, as agents
for AIG, made certainmisrepresentations to or suppressed certain facts from
the plaintiff. (Doc. 1, pp. 16-24). AIGasks for summary judgment because
“the evidence is insufficient to establish an agencyCase 1:07-cv-00883-CG-N
Document 223 Filed 11/12/10 Page 37 of 5538relationship between [AIG]
and Brady [], Lalat [], Mark [], and Michael [], either actual orapparent”
thus AIG “cannot be liable for their actions.” (Doc. 160, p. 16). The court
agrees withAIG’s arguments as to Brady Richardson, Mark Callahan, and
Michael Mangawang.10 Thecourt, however, disagrees as to Lalat and finds that
there is a genuine issue of material fact as towhether Lalat was acting as a
subagent so that his alleged misconduct might be imputed on AIG.“The law
regarding the responsibility of a principal for persons allegedly appointed
assubagents is well settled.” Booker v. United American Insurance Co., 700
So.2d 1333, 1335(Ala. 1997). “’When one employs an agent who has either
express or implied authority toemploy a subagent, the subagent will also be
the agent of the principal. … [However, t]he act ofa subagent will not bind
the original principal where the appointment of such subagent was notby
authority, express or implied, or was not subsequently ratified by the
principal…’” Id.(citations omitted). In other words, “a principal will be
bound by the acts of a purportedsubagent only if: (1) the agent had express
authority to appoint the subagent; (2) the agent hadimplied authority to
appoint the subagent; or (3) the principal ratified the appointment.” Id.
at1335-1336(citing Consolidated Underwriters Ins. Co. v. Landers, 285 Ala.
677, 681, 235 So.2d818, 822 (Ala. 1970); Eagle Motor Lines v. Hood, 256 Ala.
395, 398, 55 So.2d 126, 129 (Ala.1951); Butler v. Standard Life Ins. Co. of
the South, 232 Ala. 238, 167 So. 307, 309-310 (Ala.1936)).10 The
plaintiff does not dispute AIG’s arguments as to Brady Richardson,
MarkCallahan, and Michael Mangawang in its response. (See Doc. 170, pp.
27-32). In itssupplemental brief, J&M again does dispute AIG’s arguments
but rather states in a footnote that“[t]he Factual Narrative does not focus
entirely on Lalat but also contains many facts directlyrelating to
Callahan’s representations and active involvement in marketing VEBA Plans”
andthat “[t]he facts show Richardson participated, as well as Mangawang.”
(Doc. 197, pp. 12-13 &n. 12). While it is true that all of these
individuals were part of the transaction above, this courtfinds that the
“factual narrative” does not establish that they had the actual or implied
authorityto be deemed an agent of AIG.Case 1:07-cv-00883-CG-N Document
223 Filed 11/12/10 Page 38 of 5539AIG asserts that the contract between
AIG and Innovative “refutes” the assertion thatInnovative “was a Master
General Agent of [AIG] with the authority to appoint subagents,including
IPS… and Lalat…” (Doc. 192, p. 15). While it is true that AIG may not
haveprovided express authority to Innovative to appoint Lalat as the
subagent,11 the court finds that atrier of fact could reasonably conclude
that either AIG provided Innovative the implied authorityto appoint Lalat
or, at the least, ratified the appointment of Lalat. For instance, it is
undisputedthat Lalat had discussions with several AIG personnel “[o]n an
ongoing basis… and extensively”about the financial concepts he marketed.
(Doc. 171-1, Lalat. Dep., pp. 11-12; Doc. 172-1, LalatDep., p. 25; Doc.
178-1, Robinson Dep., p. 10). Also, Lalat, his brothers and staff met
regularlywith Peter Mordin, who is the National Marketing Director for AIG.
(Doc. 172-1, Lalat Dep., p.17; Doc. 182-1, p. 11). Furthermore, Lalat
testified that Peter Mordin and David Robinson, whohad served as senior
counsel to AIG and also as advance sales counsel, were not only aware ofand
never objected to Lalat’s marketing strategy but also allowed Lalat to use
AIG-generatedmarketing materials and software to use in his marketing. (Doc.
173-1, Lalat Dep., p. 6-7, 12,21-23). Lalat also testified that AIG would
routinely request documents from Lalat. (See Doc.171-1, Lalat Dep., pp.
17-18 & 25-26). While AIG’s arguments may be persuasive to the trierof
fact and ultimately victorious at trial, the court finds that, viewing the facts
in a light mostfavorable to the plaintiff, a trier of fact could reasonably
conclude that AIG ratified Innovative’s11 The Master General Agent Contract
between Innovative and AIG gave Innovative theauthority to “recruit and
recommend persons to [AIG]” but required that AIG “determinewhether to offer
such persons (agents) the rights to production under an agent contract
with[AIG].” The contract further provided that “[n]o agent contract shall be
effective until [AIG] hasapproved and appointed the recommended person and
issued an appropriate contract.” (Doc.193-1, p. 3). The Supreme Court of
Alabama found in Booker v. United American Ins. Co. thata principle did not
give express authority to an agent to appoint subagents since the
contractbetween the principal and the agent specifically provided that the
agent could only recommendsubagents until they were authorized by the
principal. 700 So.2d 1333, 1336 (Ala. 1997).Case 1:07-cv-00883-CG-N Document
223 Filed 11/12/10 Page 39 of 5540appointment of Lalat as a subagent.
Therefore, summary judgment as to Counts Two, Three, andFive are due to be
granted as to any misrepresentations or suppressions by Mark Callahan,
BradyRichardson, and Michael Mangawang, but summary judgment based on this
argument is due tobe denied as to any misrepresentations or suppressions by
Lalat Pattanaik.IV. Reasonable RelianceAs stated above, in Counts Two,
Four, and Five of the complaint, J&M alleges that AIGis liable for
negligence, fraud, and fraudulent concealment respectively. (Doc. 1, pp.
16-24).AIG asks for summary judgment as to these counts “because Plaintiff
could not have reasonablyrelied on purported oral misrepresentations made by
the alleged agents that contradicted the clearand unambiguous terms in the
VEBA Plan documents.” (Doc. 160, p. 21).1. Fraud (Count Four)In order to
recover for fraud under Alabama law, J&M needs to establish (1) that
AIGmade a false representation, (2) that the misrepresentation involved a
material fact, (3) that theinsureds relied on the misrepresentation, and (4)
that the misrepresentation damaged theinsureds. AmerUS Life Ins. Co. v.
Smith, 5 So.3d 1200, 1207 (Ala. 2008)(citing Liberty Nat’lLife Ins. Co. v.
Ingram, 887 So.2d 222, 227 (Ala. 2004); Ala. Code § 6-5-101
(1975)).“Moreover, a plaintiff must prove that he or she reasonably relied
on the defendant’smisrepresentation in order to recover damages for fraud.”
Id. As explained by the AlabamaSupreme Court,Because it is the policy of
courts not only to discourage fraud but also todiscourage negligence and
inattention to one’s own interests, the right ofreliance comes with a
concomitant duty on the part of the plaintiffs to exercisesome measure of
precaution to safeguard their interests. In order to recover
formisrepresentation, the plaintiffs’ reliance must, therefore, have been
reasonableunder the circumstances. If the circumstances are such that a
reasonablyprudent person who exercised ordinary care would have discovered
the trueCase 1:07-cv-00883-CG-N Document 223 Filed 11/12/10 Page 40 of
5541facts, the plaintiffs should not recover. Bedwell Lumber Co. v. T
& T Corp.,386 So.2d 413, 415 (Ala. 1980).“If the purchaser blindly
trusts, where he should not, and closes hiseyes where ordinary diligence
requires him to see, he is willingly deceived,and the maxim applies,
“volunti [sic] non fit injuria.” Munroe v. Pritchett, 16Ala. 785, 789
(1849).Torres v. State Farm Fire & Casualty Co., 438 So.2d 757, 758-759
(Ala. 1983).In Foremost Insurance Co. v. Parham, the Alabama Supreme Court
overruled Hickox v.Stover, 551 So.2d 259 (Ala. 1989), in which the court had
adopted a “justifiable-reliance”standard under which the plaintiff, to
recover on a fraud cause of action, had to prove only thathe or she had
justifiably relied on the defendant’s misrepresentation. 693 So.2d 409 (Ala.
1997).In Foremost, the Alabama Supreme Court concluded that:[T]he
“justifiable reliance” standard adopted in Hickox, which eliminated
thegeneral duty on the part of a person to read the documents received in
connectionwith a particular transaction (consumer or commercial), should be
replaced withthe “reasonable reliance” standard most closely associated with
Torres… The“reasonable reliance” standard is, in our view, a more
practicable standard thatwill allow the factfinder greater flexibility in
determining the issue of reliancebased on all of the circumstances
surrounding a transaction, including the mentalcapacity, educational
background, relative sophistication, and bargaining powerof the parties. In
addition, a return to the “reasonable reliance” standard will onceagain
provide a mechanism… whereby the trial court can enter a judgment as amatter
of law in a fraud case where the undisputed evidence indicates that theparty
or parties claiming fraud in a particular transaction were fully capable
ofreading and understanding their documents, but nonetheless made a
deliberatedecision to ignore written contract terms.Foremost, 693 So.2d
at 421“Therefore, in order to satisfy the reliance element of [its] fraud
claim, the insureds must shownot only that they relied on [AIG’s]
misrepresentation, but also that their reliance was reasonablein light of
the facts surrounding the transaction in question.” AmeriUS Life Ins. Co., 5
So.3d at1208.Case 1:07-cv-00883-CG-N Document 223 Filed 11/12/10 Page 41
of 5542AIG contends that the above count for fraud fails because J&M
could not havereasonably relied on misrepresentations made by Lalat because
J&M had a duty to read thedocuments presented to it and those documents
refute any misrepresentations made. (Doc. 160,pp. 21-29). “The return to the
reasonable-reliance standard imposes again on a plaintiff a‘general duty… to
read the documents received in connection with a particular
transaction,”Foremost, 693 So.2d at 421, together with a duty to inquire and
investigate.” Id. In other words,“[f]raud is deemed to have been discovered
when the person either actually discovered, or whenthe person ought to or
should have discovered, facts which would provoke inquiry by a person
ofordinary prudence, and, by simple investigation of the facts, the fraud
would have beendiscovered.” Gonzales v. U-J Chevrolet Co., 451 So.2d 244,
247 (Ala. 1984). The AlabamaSupreme Court has stated that “[w]hen reviewing
a plaintiff’s actions pursuant to the reasonablereliancestandard, … a
plaintiff who is capable of reading documents, but who does not readthem or
investigate the facts that should provoke inquiry, has not reasonably relied
upon adefendant’s oral representations that contradict the written terms in
the documents.” AmerUSLife Ins. Co., 5 So.3d at 1208.12 In general, J&M
asserts three general groups of12 Relying on Ex parte Seabol, 782 So.2d 212
(Ala. 2000) and Potter v. First Real EstateCo., 844 So.2d 540 (Ala. 2002),
J&M argues that whether they could have reasonably relied onAIG’s
alleged agents’ misrepresentations is a question of fact to be put to a jury
since the presenttransaction was a “complex transaction” which is a “carve
out” exception to Foremost. (Doc.170, pp. 33-34; Doc. 197, pp. 9-10). This
court disagrees. First, the documents at issue in thepresent case are
“easily understandable.” As the Alabama Supreme Court explained in
Seabol,the plaintiffs in Foremost “could have easily read” the documents in
question and determinedthat their “failure to read the insurance documents
would not have tolled the running of thelimitations period, under the
reasonable-reliance standard,” but that a different result could ariseunder
application of that standard in a case where such as in Seabol, “the documents
at issue arenot as easily understood.” 782 So.2d at 216. The documents in
the present case – the MasterPlan, the Adoption Agreement, the insurance
policies, and the Romero letter – clearly set forththe rights of the
parties, the benefits that J&M was to receive, and the risk involved
inparticipating in such a plan. Second, J&M used its own advisors in its
decision to enroll in the(Continued)Case 1:07-cv-00883-CG-N Document 223
Filed 11/12/10 Page 42 of 5543misrepresentations made by Lalat,
statements which concern (1) the purpose of the VEBA Plan;(2) the tax
attributes of the VEBA Plan; and (3) the flexibility of the VEBA Plan.a. The
Purpose of the VEBA PlanIn its complaint, J&M maintains that the
following misrepresentations occurred inregards to the purpose of the VEBA
plan:At the times alleged herein, and on more than one occasion, Callahan,
Pattanaik,Richardson and Mangawang, acting as agents for AIG represented
that theinsurance policies selected were suitable for the purposes described
and forJ&M’s needs… that the previously paid contributions were secure…
that the taxfreemonies would be paid to the beneficiaries at a future date…
that certainmodified whole life insurance policies purchased by the Trustee
could bedistributed to the insured participants at substantially reduced
surrender value…These Defendants further represent that the Plan offered an
excellent investmentopportunity… that the Plan was discriminatory as to the
choice of productsbetween employees, that the Plan offered tax free
withdrawals as deferredcompensation plus permanent life insurance…(Doc.
1, pp. 20-21).In regards to what J&M was expecting, John Wilks testified
that he entered into the VEBA Planhoping that “the VEBA Plan was going to be
the catalyst that… provides us with retirement, andthe payout over the rest
of our life, not an insurance policy.” (Doc. 159-3, J. Wilks Dep., p. 23;see
also Id., p. 15; Doc. 159-4, J. Wilks Dep., p. 12). AIG argues that the Adoption
Agreement,Master Plan, and the insurance policies contradict the above
misrepresentations or at leastprovoke inquiry, thus J&M could not have
reasonably relied on these particularmisrepresentations to the contrary.
(Doc. 160, pp. 23-24). This court agrees with AIG and findsplan. Third,
Seabol and Potter were real estate cases, and this court has not found, nor has
J&Mcited, any insurance or financial cases that would persuade this
court to reach a different result.Case 1:07-cv-00883-CG-N Document 223 Filed
11/12/10 Page 43 of 5544that J&M, through ordinary prudence, ought
to or should have discovered from these documentsthat Lalat’s alleged
misrepresentations as to the purpose of the VEBA plan were contradictory.As
stated above in the breach of contract discussion, the Master Plan,
AdoptionAgreement, and insurance policies are unambiguous. The Master Plan
and Adoption Agreementexpressly provide that J&M will send money to the
Master Trust and that the Master Trust will,in turn, purchase and then fund
a life insurance policy for John Wilks, Mike Wilks, Billy Wilks,and any
other participating employee. The Trustee thereafter received, and AIG issued,
threeseparate policies insuring the lives of John, Mike, and Billy, policies
which were received byJ&M. The written policies unambiguously state that
the Master Trust must pay a specifiedamount per year till each participant
reaches 100 or dies and upon those milestones, the policiesprovide benefits
to the beneficiaries of John, Mike, and Billy. The above documents clearly
setforth that the funds paid to the Master Trust would only be used to
purchase life insurance.Therefore, this court finds that J&M, through
ordinary prudence, ought to or should havediscovered from these documents
that Lalat’s alleged misrepresentations contradicted thedocuments that
clearly state J&M was merely purchasing life insurance. As such,
summaryjudgment is due to be granted as to Count Four in regards to any
alleged misrepresentationsconcerning the purpose of the VEBA plan.b. Tax
IssuesIn its complaint, J&M maintains that the following
misrepresentations occurredconcerning the tax consequences of the plan
contributions and the tax status of the VEBA Plan:At all times alleged
herein, and on more than one occasion, Callahan, Pattanaik,Richardson and
Mangawang, acting as agents for AIG represented… that the Planwas not a
Reportable and Listed Transaction, that the above described lifetime
taxexempt tax benefits were available under the Plan… and that the Plan had
beenapproved by the IRS…Case 1:07-cv-00883-CG-N Document 223 Filed
11/12/10 Page 44 of 5545These Defendants further represent that the Plan
provided a way to purchase lifeinsurance on a tax-favorable basis, that the
Plan was designed as a tax shelter withdeferred compensation features… that
J&M would be entitled to current incometax deductions for all
contributions, that the plan was not a Reportable and ListedTransaction, and
that the Plan had been approved by the Internal RevenueService.(Doc. 1,
pp. 20-21).AIG asks for summary judgment because J&M “cannot establish
that it reasonably relied onDefendants regarding to the tax treatment of its
contributions, because the express terms of theAdoption Agreement contradict
any alleged oral misrepresentation.” Specifically, AIG points toa provision
of the Adoption Agreement “which very closely disclosed that that the Plaintiff
alonewould assume responsibility for the tax consequences associated with
the Plan.” (Doc. 160, p.24; see also Doc. 192, pp. 7-8). AIG also maintains
that Fredrick Romero, an attorney hired bythe plaintiff, “made clear in his
written legal opinion that J&M’s Plan contributions would ‘morelikely
than not’ be viewed by the IRS as tax deductible” (Id., p. 25) and that “Bill
Wilksadmitted that he understood Romero’s opinion to say that the VEBA Plan
[and contributions]had only a ‘50/50 chance’ of surviving IRS scrutiny and
that he himself could have made thatdetermination!” (Doc. 192, p. 6).
Lastly, AIG has directed the court to the Letter ofDetermination which
states that “’No opinion is expressed or implied as to whether
employercontributions… are deductible under the Code” and to the
previously-mentioned Romero opinionletters. (Doc. 160, pp. 28-29).The
court finds AIG’s arguments persuasive. The written disclaimer in the
AdoptionAgreement signed by John Wilks clearly explains that the plaintiffs
assume responsibility for thetax responsibilities of the plan, and many of
the materials provided to J&M explicitly state thatthey should consult
their own legal and tax advisors. Furthermore, Mr. Romero, an attorney
whowas hired by J&M, provided that it was “more likely than not” that
the VEBA plan and theCase 1:07-cv-00883-CG-N Document 223 Filed 11/12/10
Page 45 of 5546contribution thereto would pass IRS muster and also
maintained that “it is possible that theInternal Revenue Service could
disagree with our position as our position is not binding on theIRS.” (Doc.
159-17, p. 18). When asked whether the “more likely than not” language was
“anacceptable level of risk for J&M, John Wilks testified that “Yeah.
Yes, it was.” (Doc. 159-3, pp.28-29), and Bill Wilks admitted that he
understood that “more likely than not” meant only a“50/50 chance.” (Doc.
159-19). This court finds that the plaintiffs cannot show reasonablereliance
on these facts, thus the defendants are entitled to summary judgment on Count
Four asto any alleged misrepresentations as to any tax issues. See Omni Home
Financing. Inc. v.Hartford Life and Annuity Ins. Co., slip op., 2008 WL
1925248, at *5 (S.D.Cal. Apr. 29,2008)(found the plaintiffs could not have
reasonably relied on tax advice by the defendantsbecause it signed
disclaimers that clearly explained the plaintiffs should not rely on
defendantsfor legal and tax advice and that they should consult their own
legal and tax advisors).c. Flexibility of the VEBA PlanIn its complaint,
J&M asserts that the following misrepresentations occurred with
respectto the flexibility of the VEBA Plan:At the times alleged herein,
and on more than one occasion, Callahan, Pattanaik,Richardson and Mangawang,
acting as agents for AIG represented… that thepolicies were flexible and
could be restructured so that annual payments could besuspended or reduced
in the event of economic hardship… that the Plan could beterminated for
economic hardship with benefits distributed to participatingemployees… that
the policies of insurance contained a hardship rider whichprovided
flexibility in the amount of premiums paid when invoked…Moreover, Callahan,
Pattanaik and Richardson represented to J&M that thepolicies of
insurance contained a hardship rider that provided flexibility in theamount
of premiums paid when invoked, and that the Plan allowed participants
torestructure payments by suspending or reducing them in the event of an
economichardship until such time J&M could continue participation, or
terminate the Planwith benefits distributed to the participating
employees…(Doc. 1, pp. 20-21).Case 1:07-cv-00883-CG-N Document 223 Filed
11/12/10 Page 46 of 5547AIG asks for summary judgment as to these
misrepresentations because “[a]gain, the underlyingdocuments signed and
adopted by J&M clearly contradict this assertion.” (Doc. 160, p.
26).This court agrees. First, Johnny Wilks signed the Benefits Disclosure
that provided that thePolicies could be converted upon employee withdrawal
due to hardship if the minimum fundingperiod of five years had been met, an
occurrence which indisputably did not occur. (See Doc.159-7, p. 2). Second,
the Master Plan and the insurance policies set forth the exclusive means
bywhich J&M could terminate its participation in the VEBA Plan or invoke
the hardship rider,respectively. In light of the foregoing, the court finds
that J&M, through ordinary prudence,ought to or should have discovered
from these documents that AIG’s agent’s allegedmisrepresentations - - that
the VEBA Plan and corresponding policies were more flexible thanwhat was set
forth in the contracts - - were fraudulent. As such, summary judgment is due to
begranted as to Count Four with regard to any alleged misrepresentations as
to the flexibility of theVEBA plan. In sum, summary judgment as to Count
Four is due to be granted in its entirety.2. Negligence (Count Two) and
Fraudulent Concealment (Count Five)In Count Two of its complaint, J&M
asserts that AIG and the other defendants “owed aduty of due care to J&M
to know and understand the Plan, to know and understand the
insurancepolicies being sold to J&M, and to provide the type of policies
that were suitable to J&M’sneeds…” and that by its “conduct, the
Defendants committed significant errors and omission incarrying out said
duty to J&M, and as a result of said negligent conduct, J&M has
suffereddamages.” (Doc. 1, p. 18). In Count Five of its complaint, J&M
maintains that “[t]heDefendants fraudulently concealed material facts from
J&M” and that it was damaged by thisconcealment. (Doc. 1, pp. 23-24).
AIG asks this court to enter summary judgment as to CountsTwo and Five for
the same reasons as the fraud count above. In other words, AIG asserts
thatCase 1:07-cv-00883-CG-N Document 223 Filed 11/12/10 Page 47 of
5548Counts Two and Five should be dismissed “because Plaintiff could not
have reasonably relied onpurported oral misrepresentations made by the
alleged agents that contradicted the clear andunambiguous terms in the VEBA
Plan documents.” (Doc. 160, p. 21).“In any negligence case, the plaintiff
bears the burden of proving the existence of a dutyowed by the defendant, a
breach of that duty, causation, and damage.’” DGB, LLC v. Hinds, ---So.3d
---, 2010 WL 2629411, at *15 (June 30, 2010)(quoting Glass v. Birmingham
SouthernR.R., 905 So.2d 789, 794 (Ala. 2004)). Alternatively, “[t]he
elements of a claim of fraudulentsuppression are: ‘(1) a duty on the part of
the defendant to disclose facts; (2) concealment ornondisclosure of material
facts by the defendant; (3) inducement of the plaintiff to act; (4) actionby
the plaintiff to his or her injury.’” DGB, LLC v. Hinds, -- So.3d --, 2010 WL
2629411, at *11(Ala. 2010)(quoting Freightliner, L.L.C. v. Whatley Contract
Carriers, L.L.C., 932 So.2d 883,891 (Ala. 2005)(other citations omitted)).
While there is no question that “reasonable reliance”is an element of a
“fraud” claim, this court has not found, nor has AIG cited, any support for
theproposition that reasonable reliance is an element of or a defense to a
negligence claim or afraudulent concealment claim. As such, AIG’s motion for
summary judgment on this ground isdue to be denied.1313 AIG also
attempts, for the first time in its reply, to seek summary judgment as
toJ&M’s negligence claim, asserting that AIG “had no duties to J&M
outside of those provided inthe Polices of insurance on the lives of the
Wilkses.” (Doc. 192, p. 17). As a procedural matter,this argument is not
properly raised because AIG raised it for the first time in its reply brief.
“Asdefendants well know, new arguments are impermissible in reply briefs.”
Abrams v. CibaSpecialty Chemicals Corp., 663 F.Supp.2d 1220, 1232 n. 16
(S.D.Ala. 2009)(citing see e.g.,Evans v. Infirmary Health Services, Inc.¸
634 F.Supp.2d 1276, 1285 n. 14 (S.D.Ala. 2009)(“thisCourt’s general practice
is not to consider new arguments raised in a reply brief”); Fisher v.
CibaSpecialty Chemicals Corp., 238 F.R.D. 273, 317 n. 89 (S.D.Ala.
2006)(“this argument is notproperly raised because plaintiffs submitted it
for the first time in their reply brief”).Case 1:07-cv-00883-CG-N Document
223 Filed 11/12/10 Page 48 of 5549V. Statute of LimitationsAIG
argues that Count Two, Count Three, and Count Five, alleging
negligence,wantonness, and fraudulent concealment respectively, should be
dismissed “because the Plaintiffwaited until after the expiration of the
statute of limitations to file its claim.” (Doc. 160, p. 29-31). These three
claims are governed under Alabama law by a two-year statute of
limitations.14See Ala. Code § 6-2-38. J&M maintains that the statute of
limitations was tolled pursuant toAlabama Code § 6-2-3 “because of AIG’s
on-going concealment of true facts.” (Doc. 170, pp.37-38).Section 6-2-3
provides that “[i]n actions seeking relief on the ground of fraud where
thestatute has created a bar, the claim must not be considered as having
accrued until the discoveryby the aggrieved party of the fact constituting
the fraud, after which he must have two yearswithin which to prosecute his
action.” Ala. Code § 6-2-3. In other words, “[t]he two-yearstatute of
limitations in a fraud case begins to run when the plaintiff discovered the
fraud orwhen the plaintiff should have discovered the fraud in the exercise
of reasonable care.” Waldrupv. Hartford Life Ins. Co., 598 F.Supp.2d 1219,
1229 (N.D.Ala. 2008)(citing Ala. Code § 6-2-3;Gray v. Liberty National Life
Insurance Co., 623 So.2d 1156, 1159 (Ala. 1993)). Section 6-2-3can be
applied to fraud and non-fraud (negligence and wantonness) claims if the cause
of action14 J&M cites Walker v. Capstone Building Corp., -- So.3d --,
2010 WL 1170094(Ala.Civ.App. Mar. 26, 2010) in support of its argument that
J&M’s wantonness claim carries asix-year statute of limitations. (Doc.
170, p. 39 n. 20). J&M’s reliance on this case, however, ismisplaced.
Unlike Walker, where the court applied the six-year statute of limitations for
trespassto the plaintiff’s wantonness claim because he was injured when he
stepped into a partiallycoveredmanhole at a construction site, J&M has
not alleged personal injury as a result of AIG’spurported conduct.
Therefore, this court finds that the two-year limitations period
governingfraud should apply to J&M’s wantonness claim.Case
1:07-cv-00883-CG-N Document 223 Filed 11/12/10 Page 49 of 5550was
fraudulently concealed from the plaintiff. Rutledge v. Freeman, 914 So.2d 364,
359(Ala.Civ.App. 2004).“The question of when a plaintiff discovered or
should have discovered an alleged fraud,for statute of limitations purposes,
is generally one for the jury. Id.(citing Ex Parte AmericanGeneral Finance,
Inc., 795 So.2d 685, 689 (Ala. 2000)). “However, the Alabama Supreme
Courthas recognized that, under certain circumstances, this question may be
decided as a matter oflaw.” Id. “’A party will be deemed to have
“discovered” a fraud as a matter of law upon thefirst of either the actual
discovery of the fraud or when the party becomes privy to the facts
thatwould provoke inquiry in a reasonable person that, if followed up, would
lead to the discovery ofthe fraud.’” Jones v. Kassouf & Company, P.C.,
949 So.2d 136, 140 (Ala. 2006)(quotingDickinson v. Land Developers
Construction Co., 882 So.2d 291, 298 (Ala. 2003)). The AlabamaSupreme Court
described this Foremost objective standard as follows:The question of when a
plaintiff should have discovered fraud should be takenaway from the jury and
decided as a matter of law only in cases where theplaintiff actually knew of
facts that would have put a reasonable person on noticeof fraud. This Court
has explained that it is the knowledge of such facts thatwould have alerted
a reasonable person to the existence of a potential fraud, andnot actual
knowledge of the fraud itself, that determines whether the question ofthe
tolling of the limitations period in a fraud case [under § 6-2-3] can be
decidedas a matter of law. As a corollary to this rule, we have held that
fraud isdiscoverable as a matter of law for the purposes of the statute of
limitations whenone receives documents that would put one on such notice
that the fraudreasonably should be discovered.Ex Parte American General
Finance, Inc., 795 So.2d at 689-690 (internalquotations and citations
omitted; last emphasis added).AIG contends that the above counts fail
because “the statute of limitations began to runwhen the Plaintiff received
written disclosures that contradicted purported oral representationsmade by
alleged [AIG] agents.” (Doc. 160, p. 29)(citations omitted). This court agrees
as tomost of the claims. As described above as to the fraud count, J&M
also bases, in part, itsCase 1:07-cv-00883-CG-N Document 223 Filed 11/12/10
Page 50 of 5551negligence, wantonness, and fraudulent concealment claims
on the same three general grounds:(1) the express representations or
omissions by Lalat of information relating to the purpose of theVEBA Plan;
(2) the express representations or omissions by Lalat of the taxability of the
VEBAplan contributions and the tax status of the VEBA plan itself; and (3)
the express representationsor omissions by Lalat of information relating to
the flexibility of the plan. For the same reasonsstated supra with regard to
the fraud claim, the court finds that J&M was placed on notice thatthe
fraud in the above situations should have been discovered when it received the
Master Plan,the Adoption Agreement, the insurance policies, and Mr. Romero’s
opinion letter in 2004. SinceJ&M did not file its lawsuit until December
21, 2007, J&M’s claims for negligence, wantonness,and fraudulent
concealment that are based on the above express representations and
allegedconcealment are barred by the two-year statute of
limitations.J&M, however, also bases its claims on Lalat’s concealment
of certain informationconcerning the taxability of the VEBA Plan
contributions and the tax status of the VEBA plan.In particular, J&M
points in its response to the following two instances of
omission/concealmentof information relating to taxability issues of the VEBA
Plan: (1) “[t]here are no documentspresented to J&M which informed its
officers that the IRS had determined the VEBA Plan wasin violation of the
final regulations issued in July 2003. AIG’s agents did not include the
finalregulations in the Due Diligence Package, even though Robinson, Mordin,
Innovative, Lalat, andAIG executives knew the final regulations existed.”;
and (2) “AIG’s agents did not includeAshton’s January 27, 2004, letter in
the Due Diligence Package, even though Lalat admitted theletter is
important… AIG’s agents did not disclose to J&M that Ashton (AIG’s
attorney)concluded the VEBA Plan had defects rendering it non-compliant.
Instead, other misleadingletters by Ashton were included in the Package
presented to J&M.” (Doc. 170, pp. 32-33). AsCase 1:07-cv-00883-CG-N
Document 223 Filed 11/12/10 Page 51 of 5552to these two specific
instances of concealment, this court does not find that any of the
documentsgiven to J&M put it on notice that Lalat and AIG were
concealing material tax information fromJ&M. Since there is a genuine
dispute as to when J&M was placed on notice of these omissions,summary
judgment as to J&M’s negligence, wantonness, and fraudulent concealment
claims thatare based on concealment of the final regulations and/or the
January 27, 2004, letter is due to bedenied.VI. Wantonness (Count
Three)AIG also asks this court to grant summary judgment as to J&M’s
wantonness claimbecause “Plaintiff cannot establish that American General
engaged in wanton conduct…” (Doc.160, p. 31). The Alabama Code defines
wantonness as “[c]onduct which is carried on withreckless or conscious
disregard of the rights or safety of others.” Ala. Code § 6-11-20(b)(3).
Fora party to be found guilty of wantonness, it must be shown that with
reckless indifference to theconsequences of its action, the party
consciously and intentionally did some wrongful act oromitted some known
duty, and that this act or omission caused the injury. Kennedy v. JackSmith
Enterprises, Inc., 619 So.2d 1326, 1328 (Ala. 1993)(citing Brown v. Turner, 497
So.2d1119 (Ala. 1986). Since this court granted summary judgment as to most
of the bases of J&M’swantonness claim, this argument only applies to
AIG’s and Lalat’s concealment of the finalregulations and/or the January 27,
2004, letter.AIG first argues that “there is no evidence to establish that…
Lalat Pattanaik… w[as anagent] of American General for the purpose of the
transaction in question.” (Doc. 160, p. 30).For the same reasons stated
supra, this court finds that a trier of fact could reasonably concludethat
AIG ratified Innovative’s appointment of Lalat as a subagent. Second, AIG
maintains thatits “only role in the transaction was providing Policies of
insurance on the lives of Bill, Johnny,Case 1:07-cv-00883-CG-N Document 223
Filed 11/12/10 Page 52 of 5553and Mike Wilks at the direction of the
VEBA Plan, and there is no evidence to suggest thatAmerican General did not
perform as required by the Policies.” (Doc. 160, pp. 30-31). Thiscourt
disagrees. There is sufficient evidence that AIG and Lalat had knowledge of
theinformation that was later concealed from J&M, that Lalat consciously
and intentionally did notpresent the information to J&M, and that
J&M was damaged by this concealment of thisinformation. Since AIG has
failed to show that there is no genuine dispute as to any materialfact,
summary judgment as to J&M’s wantonness claim that is based on AIG’s and
Lalat’sconcealment of the final regulations and/or the January 27, 2004,
letter is due to be denied.VII. Civil Conspiracy (Count Six)AIG asks for
summary judgment as to Count Six of J&M’s complaint because “J&M
hasnot stated any claim for any underlying wrong”, “a claim for conspiracy
cannot stand either.”(Doc. 160, p. 31). The Alabama Supreme Court has made
clear that “a conspiracy itselffurnishes no cause of action. The gist of the
action is not the conspiracy but the underlyingwrong that was allegedly
committed… If the underlying cause of action is not viable, theconspiracy
claim must also fail.” Allied Supply Co., Inc. v. Brown, 585 So.2d 33, 36
(Ala.1991). As to all the underlying claims that this court has found
summary judgment was due tobe granted above, summary judgment is due to be
granted as to Count Six. However, asdiscussed supra, J&M has an
underlying claim for negligence, wantonness, and fraudulentconcealment based
on AIG’s and Lalat’s omission/concealment of the final regulations and/orthe
January 27, 2004, letter. Therefore, as to that specific claim, J&M has a
claim for civilconspiracy and summary judgment is due to be denied.1515
Like its argument as to its duty under J&M’s negligence claim, AIG also
attempts, forthe first time in its reply, to seek summary judgment as to
J&M’s civil conspiracy claim,(Continued)Case 1:07-cv-00883-CG-N
Document 223 Filed 11/12/10 Page 53 of 5554VIII. IRS 6707A
penaltiesAIG asks for this court to grant summary judgment arguing that
J&M “cannot claim6707A penalties as damages” because those damages “are
too speculative” since “[t]he IRS hasassessed, but J&M has not paid,
6707A penalties in the amount of $400,000” and “[l]egislationhas passed the
Senate and the House of Representatives that may eliminate J&M’s
6707Apenalties.” (Doc. 160, p. 31-32). This court finds that the damages are
not speculative simplybecause J&M has not paid the penalties, especially
since the IRS has determined a specificamount owed and the case allegedly
has been transferred to another Revenue Agent forcollection. (See Doc. 170,
p. 40). With regard to the pending legislation, this court recognizesAIG’s
notice of additional authority filed on September 28, 2010, that stated “[o]n
September 27,2010, President Obama signed into law H.R. 5297, the Small
Business Jobs Act of 2010” and inthat legislation, “Section 2041 of H.R.
5297 amends IRC § 6707A to limit penalties for failure todisclose reportable
transactions and listed transactions for penalties assessed after December
31,2006.” (Doc. 204). A ruling on this particular issue is clearly premature
due to this newlegislation and the fact that J&M has not had a full
opportunity to address AIG’s new argument.(See Doc. 206). Therefore, this
court shall reserve its ruling on this specific ground until eachparty is
allowed to fully address it.CONCLUSIONAfter due consideration of all
matters presented and for the reasons set forth herein, it isORDERED that
the defendant=s motion for summary judgment is GRANTED as to Count
Oneasserting that specific claim is “also governed by the two-year statute
of limitations and, for thesame reasons, is barred.” (Doc. 192, p. 14). As
stated above, this court will not address thisargument because as a
procedural matter, this argument is not properly raised since AIG raised
itfor the first time in its reply brief.Case 1:07-cv-00883-CG-N Document
223 Filed 11/12/10 Page 54 of 5555and Count Four and GRANTED IN PART AND
DENIED IN PART as to Count Two, CountThree, Count Five, and Count Six. The
only remaining issues for trial are whether AIG is liablefor negligence,
wantonness, fraudulent concealment, and/or civil conspiracy when
LalatPattanaik allegedly concealed from J&M (1) the final regulations
issued in July 2003; and/or (2)the January 27, 2004, letter by Bruce L.
Ashton of Reish, Luftman, Reicher & Cohen. J&M’smotion for
reconsideration (Doc. 209) is therefore MOOT.DONE and ORDERED this 12th day
of November, 2010./s/ Callie V. S. GranadeUNITED STATES DISTRICT
JUDGECase 1:07-cv-00883-CG-N Document 223 Filed 11/12/10 Page 55 of 55

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any such advice.

FBAR/OVDI LANCE WALLACH: FBAR-What are You HidingFBAR/OVDI LANCE WALLACH: FBAR-What are You Hiding: The collapse of Swiss bank secrecy, the IRS settlement with UBS, the criminal investigation of HSBC and the related IRS voluntary disclo...

Sometimes the IRS might disagree with planning you did with other advisors and you need to find help to ensure that your rights are protected, the facts are interpreted accurately and the law applied correctly. Lance Wallach is among the few in this country who fully understand the mechanics and legal issues surrounding what has become known as “419 Plans,” often welfare benefit plans for small companies funded with life insurance. For that reason taxpayers throughout the country seek his services of his ex IRS agents and tax attorney CPAs in dealing with the Internal Revenue Service in audits, appeals and in the Tax Court.

Expert Witness

Frankly, not everybody does it right. Whether through ignorance or ill-intent, some folks sell insurance based programs with tax benefits, such as 419 Plans and 412(i) Plans, captive insurance, section 79 scams, or promote premium financing or STOLI programs to unsuspecting consumers leaving the consumer to be eaten alive, either by the IRS or by a turn in the economy, when all goes wrong. But the opposite is also true. One 419 Plan and some 412(i) Plans are very well designed and flawlessly implemented but the IRS just shoots first and aims second. Some legitimate premium financing might miscue. Building off of Lances knowledge of life insurance and the many ways life insurance has been and can be used in tax and wealth planning, lawyers for both plaintiffs and defendants throughout the US seek Lances services as an expert witness in cases between consumers and those who sold them these programs that develop after the IRS, right or wrong, initiates an audit or the investment goes under water. In looking for an expert witness examine the past. As an expert Lance Wallach’s side has never lost a case. Who else can say that?

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About Me

Lance Wallach, was a leading registered representative, insurance and annuity adviser for Mutual Benefit Life and later for New England Life. He advised thousands of high income clients on annuities, life insurance, and health insurance. Lance also counseled famous Wall Street luminaries such as Hugh Downs and Louis Rukeyser (host of long-running television programs Wall Street Week with Louis Rukeyser and Louis Rukeyser’s Wall Street). Government officials have also sought Lance’s advice, including; Corman G. Franklin of the Office of Assistant Secretary for Policy US Department of Labor and Jon S. Havicon, an Internal Revenue Service Agent.

Mr. Wallach is a member of the AICPA faculty of teaching professionals & a renowned national expert in many court cases. He is the author of many best-selling financial & financial law books.